Summary: Prediction markets let you buy and sell contracts on real-world events, blending some elements of trading with traditional wagering. However, the recent popularity of prediction markets has left taxpayers wondering how wins and losses should be reported for tax purposes. Here’s what is known today, where the uncertainty sits, and what to track now.
Do you pay taxes on prediction market winnings?
Prediction markets have been around since at least the Italian Renaissance, where individuals would wager on the outcome of local elections as well as the identity of the next Pope. Today, internet platforms such as Kalshi and Polymarket host hundreds of prediction markets on sports, elections, pop culture, cryptocurrency prices, and more.
People win and lose money every day on these platforms, which raises the inevitable question: how are those wins and losses taxed?
Because the IRS has not issued guidance, the answer to this question is not straightforward. It may depend on the nature of the transaction, the timing of the gain or loss, and even which state you live in.
What is a prediction market?
Like any other type of market, a prediction market is a place where people come together to buy and sell. In this case, the items bought and sold are event contracts that resolve to “yes” or “no” depending on whether a particular event occurs. Event contracts are typically bought and sold from 1¢ to 99¢. Winning contracts settle at $1 and losing contracts settle at $0.
You can hold an event contract until the market resolves (that is, until the event either occurs or not) or sell it at the current market price any time before then. The platform earns a profit from transaction fees on each contract as well as interest on customer deposits, although some platforms redistribute a portion of that interest back to customers.
How does a prediction market work?
A good way to understand the mechanics is to walk through the lifecycle of a particular market from inception to resolution. For example, suppose the Dallas Cowboys are playing the Green Bay Packers in a few weeks. Here is how the prediction market comes together:
| Step | What happens | Cowboys-Packers example | Key takeaway |
|---|---|---|---|
| 1. The platform creates the market |
The platform defines the event, the conditions for a “yes” or “no” outcome, the official source of truth, and rules for unusual situations, such as a tie or postponement. Unlike a sportsbook, it does not set opening odds. |
The market is defined as “The Cowboys win the game.” Contracts resolve to “yes” if the Cowboys win and “no” if the Packets win. |
The platform provides the marketplace, while traders determine contract prices. |
| 2. Traders submit complementary orders |
Traders place limit orders to buy “yes” or “no” contracts. A trade occurs when complementary offers total $1, fully collateralizing the contract. The platform charges a transaction fee to the trader who accepts the initial order. |
One trader offers to buy “yes” at 60¢, while another agrees to buy “no” at 40¢. If the Cowboys win, the “yes” contract pays $1, producing a 40¢ gain for the “yes” holder and a 40¢ loss for the “no” holder. If “no” wins, fees may reduce the holder’s payout to about 97¢. |
Every contract has opposing “yes” and “no” positions whose prices add up to $1. |
| 3. The market establishes a consensus price | As traders submit competing orders, offers are matched and the market fills. Prices change based on what participants are willing to pay. | If no one accepts the initial 60¢ “yes”/40¢ “no” pairing, another trader might offer 63¢ for “yes,” matched by 37¢ for “no.” A later trader may offer 60¢ for “yes,” seeking someone willing to pay 38¢ for “no.” |
Trading activity causes the market to converge on a consensus price reflecting participants’ expectations. |
| 4. Traders may exit before resolution | Contract holders can sell their positions for a gain or loss at any time before the event ends and the market resolves. | If the Cowboys score early and the “yes” price rises to 80¢, a trader who bought “yes” at 62¢ can sell for an 18¢ gain. A trader who bought “no” at 38¢ could sell at 20¢, taking an 18¢ loss. |
Traders do not have to hold contracts until the final result. |
| 5. The platform resolves the market | After the event, the platform continues the result, using the designated source and settles all outstanding contracts. | If the Cowboys win, every “yes” contract pays $1, regardless of its purchase price or timing. Every “no” contract resolves to $0. |
At the resolution, winning contracts pay $1 and the losing contracts pay $0, regardless of their purchase price. |
Prediction market timeframes can range from speculation about the price of bitcoin 15 minutes from now to predictions about the winner of the 2028 presidential election.
Whatever is on the horizon, the dynamics remain the same: a market is established, traders and their counterparties create event contracts, traders holding contracts can sell them at any time for a gain or loss prior to resolution of the market, and all contracts settle to $1 or $0 when the market resolves.
Are prediction markets trading or gambling?
The Commodity Futures Trading Commission (CFTC) has officially designated Kalshi and the U.S.-facing Polymarket platform as regulated contract markets. However, several states contend that sports prediction markets amount to unlicensed gambling and have issued cease-and-desist orders, which has prompted the operators to seek injunctions.
Two of these state-level, cease-and-desist orders have resulted in conflicting circuit court opinions: the Third Circuit upheld Kalshi’s injunction against New Jersey while the Ninth Circuit ruled in favor of Nevada’s right to regulate Kalshi’s sports contracts.
On September 2, 2026, New Jersey petitioned the Supreme Court to determine whether prediction market platforms should be governed by federal commodities regulators or state gambling authorities. Most other states have not commented regarding tax treatment.
How are prediction market gains and losses taxed?
The IRS has not yet issued official guidance on gains and losses from prediction market activity, though several theories are in circulation. There has been a similar guidance gap, such as in digital assets when staking rewards ran ahead of the rules.
Some argue that this is simply gambling in another form and therefore should be treated like gambling for tax purposes. Others argue that capital gain and loss treatment, or even special IRC Section 1256 treatment reserved for options and futures contracts makes more sense, since the activity is structured differently than traditional wagering.
Tax reporting from the platforms themselves does not clarify things; for example, taxpayers who won money on Polymarket in 2025 received a 1099-MISC form that simply reported winnings in box 3 as “other income.”
The big question for taxpayers and the IRS is whether the structure of an event contract creates a different result than a wager.
- If prediction market activity is treated as gambling,
winnings would be taxed as ordinary income. However, due to a recent change made by the One Big Beautiful Bill Act (OBBBA), only 90% of gambling losses would be deductible against those winnings.
- If prediction market activity gets capital asset treatment,
then winnings would be capital, and 100% of losses could be used to offset gains.
What happens if you sell a contract before it resolves?
It is possible that the IRS may treat contracts that settle at $1 or $0 as gambling activity, while treating sales of contracts before a market resolves as capital activity. That split could lead to some unusual tax situations.
Going back to the football example.
Suppose the Cowboys are up by 14 points with two minutes left in the game, you hold a “yes” contract you purchased for 60¢. You could sell the contract at 99¢ for a 39¢ capital gain, or you could wait a few minutes until the game is over, producing 40¢ of ordinary income that may leave you worse off after tax.
The same logic can be used the other way.
If you hold a 40¢ contract for the Packers to win, you might prefer to sell at 1¢ for a 39¢ capital loss rather than let the contract settle for $0 and end up with a 40¢ gambling loss that is only 90% deductible.
Final thoughts: prediction market tax treatment is still unsettled
Prediction markets have hit the mainstream in the last few years. When cryptocurrency became widespread, the IRS and Congress responded. Now, the recent surge in prediction market activity may create similar conditions for the IRS to issue specific guidance in the near future.
Until then, the question of whether to treat prediction market gains and losses as gambling activity or capital activity remains unclear. What you can do now is keep clean records of every position, note whether each one settled or was sold before resolution, and talk with your tax advisor before you file.
Prediction market rules are still taking shape, and the reporting choices you make now can follow you. Aprio’s tax advisors can help you document your activity and evaluate the treatment that fits it, because you don’t know what you don’t know.
