How Are Prediction Market Winnings Taxed? (2026 IRS Guide)

How the IRS classifies prediction-market winnings

Because Kalshi and Polymarket are CFTC-registered derivatives exchanges, the IRS treats event-contract profits as ordinary income — not as gambling income. This affects how you report (Form 1040, not Schedule 1 line 8b), what you can deduct, and how losses carry.

Federal reporting thresholds

• •Kalshi issues a 1099-MISC or 1099-K if you cross the IRS threshold (currently $5,000 in aggregate annual proceeds; the threshold has been changing — check the current year's IRS guidance).
• •Polymarket does not auto-issue 1099s. You are responsible for tracking and reporting your own P&L.
• •Either way, all net winnings are taxable whether or not you receive a 1099.

State tax

Eight states have no state income tax (Florida, Texas, Washington, Nevada, Tennessee, South Dakota, Alaska, Wyoming) plus New Hampshire (no tax on earned income). Residents of those states owe federal tax only on prediction-market profits.

Higher-tax states layer their normal income-tax bracket on top of federal: California up to 13.3%, New York up to 10.9% plus NYC city tax, Hawaii up to 11%, Oregon up to 9.9%.

Deductions and losses

• •Trading losses can offset trading gains within the same tax year.
• •Net losses cannot offset W-2 wages or other ordinary income (unlike a true business — you'd need trader-tax-status election for that).
• •Bonuses (e.g. the $10 MIAPREDICTS credit) are not taxable when received — only the net winnings you ultimately withdraw are taxable.

What records to keep

• •Year-end account statement from Kalshi (downloadable from Settings → Statements).
• •For Polymarket: export your trade history from the iOS app and keep copies of bank deposits/withdrawals.
• •Bank statements showing deposits to and withdrawals from the platforms.

This guide is general information, not tax advice. For complex situations (large positions, multi-state residency, trader-tax-status election), work with a CPA familiar with derivatives tax.

What you actually report

Because event contracts trade on a CFTC-regulated exchange, most traders report net trading gains and losses rather than the gross-winnings-and-itemised-losses treatment that applies to gambling. Exchanges generally issue a year-end tax form summarising your activity; that form, not your own screenshot of a profitable trade, is the number the IRS receives.

Florida-specific notes

• •Florida levies no state personal income tax, so there is no state filing on trading profits.
• •Federal tax still applies to net gains regardless of which platform you used.
• •Keep your own record of deposits, withdrawals and closed positions — reconciling later is far harder.
• •Losses generally offset gains within the same activity; carryforward rules depend on your classification.

Common mistakes

The two most frequent errors are assuming no form means no reporting obligation, and mixing platforms without keeping a consolidated record. If you traded on more than one exchange during the year, pull statements from each before filing.