Are Kalshi and Polymarket Losses Tax Deductible? It Depends on One Choice

Usually yes, but the method you choose decides how much a loss is worth, and in a losing year that choice matters more than in a winning one. The same $10,000 loss can cut your tax this year, carry forward for years, reach back into old returns, or be worth exactly nothing. Here is each path.

Are prediction market losses tax deductible?

How do losses work under capital gains?

Losses first cancel out gains of the same kind, then up to $3,000 of your other income (wages, say) each year. Anything left over carries forward to next year and the year after, with no expiry, until it is used up.

Lose $12,000 in 2026 with no other gains and you deduct $3,000 against your salary this year, then $3,000 in each of 2027, 2028 and 2029. In the 24% bracket that is about $720 back each year. Not exciting, but nothing is wasted. And if you have a winning year in between, the carried-forward loss offsets those gains first, in full.

You report it on Form 8949 and Schedule D. Kalshi trades go in box C (short-term), polymarket.com trades in box I, because they are digital assets.

Can you carry a Section 1256 loss back?

A net Section 1256 loss follows the same $3,000 rule, with one extra option: you can elect to carry it back up to three years, but only against Section 1256 gains you reported in those years. If you had profitable futures trading in 2023, for example, a 2026 loss could get you a refund of tax you paid then. You make the election on Form 6781 and claim it for the earlier year with an amended return. The limits and a worked example.

Two catches. Section 1256 itself is contested for event contracts (the expert scoreboard leans against it), and it does not apply at all to polymarket.com trades. A carryback built on a contested treatment is a bigger bet than a carryforward.

Can an ordinary income loss reduce your other income?

Reporting trading results as ordinary income nets your winners against your losers within the year. Whether a net loss for the year can then reduce your other income, and by how much, depends on things like whether your trading is a business. This is a question to put to a preparer rather than take from a blog, including ours.

When is a gambling loss worth nothing?

Gambling treatment has three rules, and each one shrinks a loss:

1. Losses only offset gambling winnings. Never your salary.
2. Only if you itemize. Take the standard deduction and your losses count for nothing.
3. Only 90% of losses, from 2026. The One Big Beautiful Bill Act cap.

And wins and losses are tracked by session rather than netted for the year. Say your winning days add up to $30,000 and your losing days to $40,000: a $10,000 loss. Itemizing, your losses cancel the $30,000 of winnings and the other $10,000 is simply gone. On the standard deduction, you owe tax on $30,000 of winnings in a year you lost money.

Can you claim losses from years you already filed?

If you lost money in a past year and never reported it, you can generally amend that year’s return within three years of filing it (or two years of paying the tax, if later) to claim the loss under capital treatment, and the unused part starts carrying forward from there. If you reported winnings in a past year as gambling and now think another treatment fits better, that is a bigger decision to make with a preparer. What to do about unreported past years.

If you sold at a loss and bought back within 30 days, also read whether the wash sale rule applies.

Are trading fees deductible?

Trading fees are not a separate deduction. They go into your cost when you buy and come off your proceeds when you sell, so they make your gains smaller and your losses larger. A tool that drops them understates your loss.

How much is your loss worth?

WagerMints prices your losing year under all four methods, shows how much carries forward, and lets you enter last year’s unused capital loss so it is applied first. The guide covers the carryforward worksheet.