How are prediction-market winnings taxed?

Prediction-market taxation is the body of tax law governing how profits and losses from trading event contracts — wagers on the outcome of real-world events made through platforms such as Kalshi or Polymarket — are treated by tax authorities. As of July 2026, gains from these positions are taxable income in most jurisdictions, yet the precise classification (capital gain, ordinary income, or gambling winnings) varies by country, platform type, and regulatory status. Getting the treatment wrong means under-reporting income that on-chain records make straightforwardly reconstructable.

Not tax advice. This explainer is educational only. Tax rules differ by jurisdiction and change frequently. Consult a qualified tax professional before filing.

Why Classification Matters

Not all event-contract profits land in the same tax bucket, and the bucket determines the rate.

• CFTC-regulated contracts (e.g., those traded on a designated contract market): In the United States, these may qualify as Section 1256 contracts — taxed at a blended 60% long-term / 40% short-term capital-gains rate regardless of holding period. As of July 2026, the IRS has not issued definitive guidance confirming all prediction-market contracts qualify, so professional advice is essential.
• Unregulated or offshore platforms: Gains more likely treated as ordinary income or gambling winnings, taxed at the trader's marginal rate.
• On-chain platforms (e.g., Polymarket on Polygon): Transactions are publicly recorded on the blockchain. Tax software such as Koinly or CoinTracker can reconstruct every trade, meaning the "I didn't get a 1099" defence holds little weight.

A Worked Example

Suppose a US-based trader buys 500 contracts on Kalshi at $0.40 each, paying $200 total. The event resolves in their favour; each contract pays $1.00, returning $500.

• Gross profit: $500 − $200 = $300
• If treated as a Section 1256 contract: 60% ($180) taxed at the long-term rate (say 15%) = $27; 40% ($120) taxed at the short-term rate (say 22%) = $26.40. Total tax ≈ $53.40, an effective rate of ~17.8%.
• If treated as ordinary income at a 22% marginal rate: $300 × 22% = $66.00.

The classification difference costs or saves roughly $12.60 on a $300 gain — the gap widens sharply at higher profit levels.

Jurisdiction Snapshot

Tax treatment outside the US differs materially. As of July 2026:

• United Kingdom: HMRC has not issued dedicated prediction-market guidance. Profits may fall under capital gains tax or, if trading is frequent and systematic, income tax. The annual CGT allowance dropped to £3,000 in April 2024.
• Australia: The ATO treats most speculative contract gains as ordinary income. On-chain activity is explicitly within the ATO's crypto-asset reporting framework.
• Germany: Private speculation gains held under one year are taxable; over one year may be exempt under §23 EStG — but application to prediction markets is unconfirmed as of July 2026.
• Canada: Gains treated as either business income or capital gains depending on trading frequency; 50% capital-gains inclusion rate applies to qualifying positions.

Always verify with local counsel. Prediction-market tax law is an actively evolving area in every jurisdiction listed above.

Record-Keeping Essentials

Good records transform a stressful audit into a paperwork exercise.

• Export trade history from every platform immediately after each tax year ends — platforms close accounts or change data-retention policies.
• On-chain platforms: Use a wallet-connected tax tool (Koinly, Coinpanda, TokenTax) to pull Polygon transaction data automatically. Every trade has a timestamped, immutable hash.
• Track cost basis per position, not just net deposits and withdrawals. The IRS (and most equivalents) wants gain/loss per transaction.
• Retain records for at least seven years in the US; six years in the UK; five in Australia.

For a broader overview of how winnings interact with platform terms and withdrawal rules, see the WeeBet taxes guide.

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Frequently Asked Questions

Do I owe tax if my prediction-market profits stay on the platform?

Yes, in most jurisdictions. Tax liability typically arises when a position resolves and the gain is realised — not when funds are withdrawn to a bank account. Leaving winnings in a platform wallet does not defer the taxable event.

Is Polymarket legal and taxable for US users?

As of July 2026, Polymarket blocks US IP addresses and does not hold a CFTC licence. US persons using it via VPN face both legal risk and full tax liability on any gains, which the public Polygon ledger makes auditable. This is not a situation where offshore status removes reporting obligations.

Can I deduct prediction-market losses against other income?

Deductibility depends on classification. Section 1256 losses can offset Section 1256 gains and up to $3,000 of ordinary income annually in the US, with carry-forward provisions. Losses classified as gambling losses are only deductible against gambling winnings, not wages or investment income.

What happens if a platform doesn't send me a 1099?

The absence of a 1099 does not remove your reporting obligation. The IRS requires taxpayers to self-report all income; on-chain platforms generate a permanent public record that tax authorities can — and increasingly do — cross-reference using blockchain analytics firms.