Are prediction markets taxed as gambling?
If your Kalshi or Polymarket trades are treated as gambling, only 90% of losses are deductible from 2026, and only if you itemize. How it works, with examples.
Updated October 7, 2026 · By the PolyTax team
The short version
- There’s no IRS ruling that prediction-market trades are gambling, but it’s one of the treatments tax professionals consider, especially for sports contracts.
- Under gambling rules, winnings are taxed in full. Losses are deductible only if you itemize, and only up to your winnings.
- From 2026, only 90% of gambling losses are deductible, so a trader who breaks even can still owe tax.
- For most active traders, gambling treatment is the most expensive option.
Why gambling treatment comes up
Prediction markets are regulated as financial exchanges, but many contracts look like bets, especially on sports. The IRS hasn’t said how event contracts are taxed, and some tax scholars have argued that sports event contracts are wagers for federal tax purposes. So gambling is one of four treatments worth comparing, along with capital gains, Section 1256 and ordinary income.
How gambling income is reported
- Winnings from each winning wager go on Schedule 1, line 8b, in full.
- Losses go on Schedule A, line 16, as an itemized deduction, capped at your winnings.
- If you take the standard deduction, losses don’t reduce your tax at all.
Wins and losses aren’t netted on the front of your return, so your adjusted gross income goes up even in a break-even year. That can affect other credits and deductions tied to your income.
The 90% rule from 2026
The One Big Beautiful Bill Act, signed in July 2025, changed the rule for tax years starting in 2026: only 90% of gambling losses count, and the deduction is still capped at your winnings.
That may not last. In September 2026 the House Ways and Means Committee approved the FULL HOUSE Act, which would restore the full deduction, 38 votes to 5. It still has to pass the full House and the Senate and be signed, so for now the 90% limit is the law. Watch for news before you file a 2026 return.
What it means in practice
Take a trader with $80,000 of winning positions and $70,000 of losing positions in 2026, a $10,000 profit:
| Treatment | Added to taxable income |
|---|---|
| Capital gains | $10,000 |
| Gambling, itemizing | $80,000 − (90% × $70,000) = $17,000 |
| Gambling, standard deduction | $80,000 |
A trader who broke even, winning $50,000 and losing $50,000, would add $5,000 to taxable income if itemizing and $50,000 if not. (Itemizing only helps if your total itemized deductions beat the standard deduction.)
What counts as one wager?
Gambling rules work wager by wager, and for a trader that isn’t obvious. You can treat each market as one wager, netting every trade in it, or each day of trading as one session. The choice changes your gross winnings and losses, so pick a method and apply it consistently.
Is gambling treatment ever the right choice?
It may be if a professional concludes your contracts are wagers, for example sports contracts. It’s rarely the cheapest option, so compare all four treatments with your own numbers before you decide. For the platform-specific details, see Kalshi taxes and Polymarket taxes.
Common questions
Are Kalshi winnings gambling income?
There’s no IRS ruling either way. Most traders report Kalshi trades as capital gains; gambling treatment is considered mainly for sports contracts. Compare the treatments with a tax professional.
Do Kalshi or Polymarket send a W-2G?
No. Neither sends the W-2G that casinos and sportsbooks issue for large wins.
Can I deduct prediction-market losses if I take the standard deduction?
Not under gambling treatment, where losses are only an itemized deduction. As capital losses, you can deduct net losses up to $3,000 a year whether or not you itemize.
Will the 90% gambling loss rule be repealed?
Possibly. A bill restoring the full deduction cleared the House Ways and Means Committee in September 2026, but it still needs the full House, the Senate and the President’s signature. Until then, the 90% limit applies to 2026.
Does the 90% limit apply to 2025?
No. It applies to tax years beginning after December 31, 2025, so 2026 returns are the first affected.
Sources
- IRS Topic 419: Gambling income and losses
- Congress.gov: H.R. 1, One Big Beautiful Bill Act
- Card Player: House Ways and Means Committee passes bill to repeal the 2026 gambling tax change
- Tax Law Center: Are sports event contracts on prediction markets gambling for federal tax purposes?
This guide is general information, not tax advice. The IRS hasn't issued guidance on prediction markets, so check your situation with a tax professional before you file.