How are Prediction Markets Taxed in 2026?
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Key takeaways
- In the US, prediction market taxes usually come down to classification, is it treated as gambling, or as trading in a financial contract
- If it is gambling, winnings are taxable and losses are generally deductible only if you itemize and only up to winnings
- Starting January 1, 2026, a new federal limit generally caps the gambling-loss deduction at 90 percent of losses (still subject to the up to winnings cap), which can create taxes even for break-even activity
- If the contracts qualify as Section 1256 contracts, they can be marked-to-market and may receive 60/40 capital-gains treatment, reported on Form 6781
- The rules are not settled for all products, and ongoing regulatory fights over whether sports-style event contracts are gambling or derivatives could shift how conservative filers approach taxes
Prediction markets are often described as betting, but traded like a market. That hybrid identity is exactly why taxes get confusing. In the US, the tax outcome usually turns on a single issue, whether what you did is treated as gambling or as trading in a financial contract.
That distinction affects your tax rate, what you can do with losses, and how much recordkeeping you need to do to support your numbers if the IRS ever asks.
The classification problem
A sportsbook bet is almost always treated as gambling for tax purposes. Prediction market event contracts can look different, especially when they trade on an exchange-like venue and can be bought and sold before resolution. That is why you see debate about whether some event contracts belong in a derivatives bucket rather than a wagering bucket.
This also explains why prediction market apps are sometimes described as “tax advantaged” compared with sportsbooks, at least under current practice and before clearer IRS guidance.
If the IRS treats it as gambling
If your prediction market activity is treated as wagering, the IRS rules are familiar. Gambling winnings are taxable income, even if you do not receive a tax form. Losses are where people get tripped up. In general, gambling losses are deductible only if you itemize and only up to the amount of gambling winnings you report. The IRS also expects you to keep records that back up both winnings and losses.
There is also a major change starting January 1, 2026. Federal law limits the gambling-loss deduction to 90 percent of losses, still subject to the up to winnings cap. That means it is possible to end the year roughly break-even and still owe federal tax.
If it is treated like financial trading
Some prediction market products are discussed as if they resemble futures or options more than wagers. In that world, gains and losses may be handled more like investment or derivatives results. The scenario people talk about most is Section 1256, because it comes with two special features.
Section 1256 contracts are generally marked to market at year end, meaning positions may be treated as sold for tax purposes at fair market value even if you did not close them. Section 1256 net gains and losses generally get 60/40 treatment, with 60 percent long-term capital gain and 40 percent short-term, regardless of how long you held the position. When Section 1256 applies, taxpayers generally use Form 6781.
One important reality check. Not every prediction market contract qualifies as a Section 1256 contract. Whether a specific event contract fits depends on product structure and how and where it trades.
Image Credit: PJ McDonnell/Shutterstock
Why people call prediction markets tax advantaged
The argument you keep seeing is basically this, sportsbooks push you into the gambling framework, while some event contracts may land in a framework that looks more like trading. If that happens, the tax result can be friendlier, especially around loss treatment.
A commonly cited set of claimed advantages is that prediction market losses may be more usable than sportsbook losses, and that reporting can look more like trading than like “gross winnings” gambling reporting. These claims depend heavily on how the activity is characterized and how it is reported.
If your activity is characterized as wagering, you are back in the gambling rules, itemizing, losses capped to winnings, and the 2026 limitation that only 90 percent of losses count.
How the numbers typically get calculated
In plain English, prediction markets create gains and losses in two common ways. If you sell a contract before resolution, you usually have a realized gain or loss at the time you sell. If you hold to settlement, you usually have a gain or loss when it resolves and pays out.
Under a trading framework, the math is generally proceeds minus your cost basis, including relevant fees. Under a gambling framework, it is commonly framed as winnings and losses, with the loss deductions limited by the rules above.
The paperwork problem most people underestimate
Even if the tax rate looks better under a trading framework, the compliance burden can be heavier. Active traders can rack up many taxable events, opens, closes, partial fills, and settlements across lots of contracts.
Here is a simple record checklist that tends to cover what you will need:
- Your full trade history, including date/time, contract, quantity, price
- Fees paid
- Settlement proceeds and resolutions
- Year-end positions and values if you are in a mark-to-market regime
Why the regulatory fight matters for taxes
Classification is not just a tax debate. The legal and regulatory tug-of-war affects how these products are treated in the real world.
States have challenged sports-style event contracts as unlicensed wagering, while federal regulators and market participants have argued these contracts function more like financial derivatives. The outcome of these disputes can influence how conservative taxpayers and preparers approach classification, risk, and documentation.
Image Credit: PJ McDonnell/Shutterstock
Where to play and current bonus codes
Looking for a platform to try? The table below highlights popular providers and their bonus codes, with links to our deeper reviews if you want a full breakdown of features, fees, and offer terms.
| Platform | Promo code | Welcome offer | Min deposit | Availability snapshot |
|---|---|---|---|---|
| Kalshi | CORG | $10 bonus | $1+ | Most states except AR, AZ, CT, IL, LA, MA, MD, MI, MT, NJ, NV, and OH |
| Crypto.com | No promo code needed | Up to $50 bonus | $10 | Most states + DC; not promoted in select states |
| Underdog | CORG | Play $5, get $75 bonus entries | $10 | 40 states + DC. Offer not valid in MD, MI, NJ, NY, OH, PA. |
| Polymarket | No promo code needed | $10 free trade | $1 | Rolling out on a waitlist to most states |
FAQ
Yes. In the US, profits from prediction markets are taxable. The main question is how they are taxed, as gambling income or as trading gains.
It depends on the product and the facts. Some activity may be treated as wagering, especially if it closely resembles traditional betting. Some contracts may be argued to resemble financial instruments.
If your activity is treated as gambling, losses are generally deductible only if you itemize and only up to winnings, with an additional 2026 limitation that only 90 percent of losses may count. If treated as trading, loss rules can look more like investment or derivatives losses.
“60/40” refers to tax treatment that applies to certain Section 1256 contracts, where gains and losses are treated as 60 percent long-term and 40 percent short-term capital gain, regardless of holding period. It is not automatic and depends on whether the contract qualifies.
They can. Active trading can generate many separate gain and loss calculations, which is why trade history exports and careful records matter.
Disclosure
This article is general information about US federal tax concepts and not tax advice. Prediction market taxation depends on the product’s legal and tax characterization and your specific facts. If you are trading meaningful volume or taking a strong position on classification, it is worth getting advice from a US tax professional.
Title Image Credit: Summit Art Creations/Shutterstock
