Nobody at Polymarket or Kalshi is going to tell you what you owe. That's not a knock on either platform, it's just the reality of trading in a category the tax code was never written for. Kalshi hands you some paperwork if you clear certain thresholds. Polymarket hands you nothing, ever. And in both cases, that paperwork gap gets read by a lot of traders as "maybe this doesn't count."
It counts. Every dollar of income you make from a resolved contract is taxable under federal law, whether or not a form ever lands in your inbox. That part isn't up for debate. What is genuinely up for debate and this is the part that actually matters for your wallet is how that income gets classified, because the answer changes your tax bill by a lot depending on which of three competing frameworks applies to your situation.
This guide walks through all of it: the classification fight, the platform-by-platform documentation mess, the new loss deduction rule that kicked in for 2026, and a step-by-step process for actually working out what you owe. This is a US-focused guide. It is not legal or tax advice, it's the map you need before you sit down with someone who can give you that advice for your specific numbers.
First: yes, you owe tax, even with zero paperwork
Section 61 of the tax code is blunt about this. Income from any source is taxable unless Congress specifically carved out an exception, and nobody carved out an exception for event contracts. A tax attorney quoted in a recent MarketWatch piece put it about as plainly as it can be put: it's taxable income, whether or not you get paperwork.
So the "no 1099, no problem" theory doesn't hold up. What actually matters is this: the IRS has not issued a single Revenue Ruling, Private Letter Ruling, or FAQ addressing prediction market contracts directly. That silence is why three different, defensible tax treatments currently exist side by side, and why serious traders end up needing a professional rather than a blog post to make the final call.
The three ways your winnings can be classified
Here's the breakdown, side by side, because the differences are easier to see in a table than buried in three paragraphs.
A quick word on why Section 1256 is contested rather than a slam dunk: it requires the contract to trade on a "qualified board or exchange." Kalshi being CFTC-regulated helps that argument, but the CFTC has separately classified these instruments as binary options that are swaps and that swap characterization can specifically knock a contract out of Section 1256 eligibility under the statute's own language. Some CPA firms will sign off on 1256 treatment for high-volume Kalshi traders. Others won't touch it without a written opinion from a tax attorney first. That split alone tells you how unsettled this actually is.
One rule that isn't optional, whichever framework you land on: be consistent. If you trade both platforms and decide gambling treatment fits your Polymarket activity while ordinary-income treatment fits Kalshi, that's fine as long as there's a real reason the platforms differ, and you can explain it if asked. Switching frameworks between good years and bad years on the same platform is the kind of thing that draws attention.
Kalshi, Polymarket, and Robinhood: who actually sends you paperwork
This is where a lot of confusion starts, because "regulated" and "gives you tax documents" turn out to be two different things.
If you're trading event contracts on Robinhood too, don't assume the familiar 1099-covered-everything experience from your stock trading carries over; it doesn't, and the mechanics there are different enough that we've laid them out separately in our Robinhood Prediction Markets 2026 guide.
Polymarket is the one that trips people up the worst, because it isn't just a documentation gap, it's a second tax problem stacked on top of the first. USDC is property in the eyes of the IRS, not cash. That means converting dollars into USDC, spending USDC to open a position, and receiving a USDC payout are each potentially their own taxable event, each with its own basis to track. If you've never set up a wallet with this in mind, it's worth doing that groundwork before you're deep into a trading year. Our guide on setting up your first Polymarket wallet without losing money to fees covers the setup choices that make this recordkeeping less painful later.
And withdrawals matter here too, not just deposits. Pulling funds off either platform is often the moment a position actually converts to something you can spend, which is exactly the moment tax obligations tend to crystallize. If you've hit friction trying to get funds out, that's a separate headache worth solving on its own terms see what to do if Polymarket withdrawal isn't working or how to fix Kalshi withdrawal issues but don't let withdrawal problems distract you from the fact that the underlying trade may already have been a taxable event regardless of whether the cash-out went smoothly.
The 90% loss cap: the single biggest change for 2026
If you only remember one number from this entire guide, make it this one.
For tax years before 2026, a taxpayer who itemized could deduct gambling losses dollar-for-dollar against winnings, up to the amount won. Win $60,000, lose $60,000, owe nothing on the activity that was the deal.
Starting with tax years beginning after December 31, 2025, that deal changed. You can now only deduct 90% of your losses, still capped at your winnings. Run the same numbers under the new rule:
That gap between old and new is what accountants have started calling phantom income tax owed on money you never actually kept, purely because the deduction math no longer fully offsets your losses. It hits hardest on high-volume, high-turnover trading, which describes a lot of active prediction market activity.
This cap matters specifically for gambling-income treatment. If your activity instead qualifies as ordinary income, the netting generally works differently and this particular cap doesn't apply the same way which is one more reason the classification question from earlier in this guide isn't academic. It's the difference between a break-even year costing you nothing and a break-even year costing you real money.
Worth knowing: there's active, bipartisan pushback on this provision in Congress, with more than one bill introduced to restore the full deduction. As of right now it's the live rule, but don't be surprised if it's still being fought over by the time you file.
Working out what you actually owe: a step-by-step process
Pull every record you have, from every platform. Year-end statements, any 1099s issued, P&L exports. For Polymarket, that also means exporting your portfolio history from the platform interface and cross-checking your wallet on a Polygon block explorer.
Separate gross winnings from gross losses. If you're heading toward gambling treatment, you need both figures independently; you can't just net them and report one number, because the deduction side is capped and conditioned on itemizing.
Establish basis on every USDC transaction if you traded on Polymarket. Crypto tax software can help normalize the on-chain data, but these tools were built for wallet-to-wallet transfers, not conditional-token resolutions that check the output by hand rather than trusting it blind.
Apply the 90% cap if gambling treatment applies to you. Multiply gross losses by 0.9, compare that to gross winnings, and deduct whichever is smaller. Whatever's left over is taxable, even in a flat year.
Figure out if you're a casual trader or a professional for tax purposes. The test comes from a Supreme Court case, Commissioner v. Groetzinger, and it asks whether you're doing this close to full-time, with profit as the primary goal, on a regular and continuous basis not sporadically. Professional status changes your filing mechanics (Schedule C instead of Other Income) and matters most for traders running this like an actual operation rather than a side habit. If that's closer to your setup, the discipline required looks a lot like what we cover in how to trade prediction markets like a hedge fund and that same discipline is exactly what an IRS examiner will expect to see documented if your professional-trader claim ever gets questioned.
Check your state separately from federal. State rules on gambling income and loss deductions don't automatically mirror federal law, and some states don't allow a loss deduction at all regardless of what the IRS permits. This is not a category to guess your way through if you live somewhere with its own gambling-tax quirks.
What to actually keep, and for how long
- Every year-end statement and P&L report each platform gives you.
- Every 1099 you receive, even ones that don't cover your trading gains directly (1099-INT, 1099-MISC).
- Full trade history exports, especially from Polymarket, since the platform is your only source of truth.
- Wallet exports from the blockchain itself if you're on Polymarket the chain is the record, not the app's front end.
- Screenshots of a market's resolution criteria taken close to when it closes. Criteria and details can get harder to find once a market's done.
- A running log of your trading pattern and intent, in case professional-trader status ever comes into question.
- Any correspondence with a CPA or tax attorney. If the IRS eventually issues guidance that conflicts with a reasonable position you took in good faith, documented professional advice is real protection against penalties.
The IRS generally has three years to audit a return, six if income was substantially underreported. Keep records with that window in mind, not just through April.
Where people actually get this wrong
The most expensive mistake is assuming no form means no tax. It doesn't work that way, and it's the single most common reason people end up with an unpleasant letter later.
Second most common: netting wins and losses into one number when gambling treatment requires reporting them separately. Reporting only your net profit under that framework can understate your income even when your own math was correct.
Third: forgetting the crypto layer entirely on Polymarket. Treating USDC like cash instead of property with its own basis is an easy way to miss taxable events that have nothing to do with whether a market is resolved in your favor.
Fourth: taking the standard deduction and assuming gambling losses still count somehow. They don't. Not partially. If you don't itemize and your activity is gambling income, the loss side of the ledger is simply gone.
Fifth: switching between classification frameworks inconsistently, without being able to explain why, if you trade across platforms.
Frequently Asked Questions
Do I owe tax on Polymarket winnings even though the platform sends no forms at all? Yes. The absence of any tax form doesn't reduce the obligation. It just means you're the one responsible for tracking and reporting it.
Can I deduct my losses if I take the standard deduction? Not under gambling-income treatment that deduction requires itemizing on Schedule A. If your activity is treated as ordinary income instead, the mechanics are different, which is one more reason getting the classification right matters before you file.
What exactly is the 90% loss cap, and does it apply to me?Starting with the 2026 tax year, itemizing taxpayers can deduct only 90% of gambling losses, still capped at winnings. It applies most directly if your prediction market activity is classified as gambling income which is the likely default for casual traders and for Polymarket activity specifically.
Is Kalshi's regulation enough to get favorable Section 1256 tax treatment? Not automatically. CFTC oversight is a regulatory status, not a tax classification, and the CFTC's own characterization of these contracts as swaps could work against the Section 1256 argument. Some firms support this position for active Kalshi traders; get a professional opinion before relying on it yourself.
Does trading on Robinhood's event contracts work differently for tax purposes? Yes, in that Robinhood explicitly does not issue 1099s for these trades either, despite being a familiar, fully regulated brokerage for everything else you might trade there. See our full breakdown for the platform-specific details.
The bottom line
The tax question on prediction markets was never "do I owe anything" it's always been "how is this classified, and what does that do to my number." Three frameworks currently compete for that answer, the platform you trade on shapes which one is realistic, and a rule that took effect this year can create a tax bill even in a year where you didn't actually make money. If your trading is more than pocket change, this is worth an actual conversation with a CPA who can look at your specific platforms, your state, and your risk appetite, not a generic guide, however detailed.
This article is for informational purposes only and isn't tax or legal advice. Prediction market taxation is unsettled and fact-specific talk to a qualified CPA or tax attorney about your own numbers before you file.
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