How Are Kalshi and Polymarket Trades Taxed? The 4 Methods Traders Actually Use

Kalshi and Polymarket both let you trade contracts on real-world events: will the Fed cut rates, who wins the election, will a market close above a price by Friday. Neither platform sends you a Form 1099-B for that trading. Kalshi may send a 1099-MISC for referral bonuses and a 1099-INT for interest on your cash balance, and Polymarket sends nothing at all. The trades themselves are entirely on you to report, and here is the part that surprises most people: the IRS has never issued specific guidance on how to report them.

That is not a technicality. Event contracts do not fit cleanly into any of the categories Congress and the IRS built the tax code around. So instead of one right answer, four different treatments are all in active use by real filers today, and they can produce very different numbers from the exact same trades. Understanding all four, before you file, is the actual problem this post is about.

The four methods

Capital gains (Form 8949 / Schedule D). Each position is treated like a stock or crypto trade: you realize a gain or loss when it closes, net your gains and losses for the year, and if you end up with a net loss you can deduct up to $3,000 against other income, carrying the rest forward to future years. Contracts held over a year get lower long-term rates, but almost all prediction-market trades resolve in weeks, so this mostly acts like short-term capital gains taxed at your ordinary rate. This is the default most crypto tax preparers reach for.

Ordinary income (Schedule 1, Line 8). Your net profit for the year is taxed at your normal income rate, full stop. There’s no $3,000 cap on losses and no itemizing required to deduct them; they just net out. It’s simple to file, but usually not the cheapest option if you’re profitable, since capital-gains treatment or Section 1256 can tax the same profit at a lower effective rate.

Gambling income (§165(d)). You report your total winnings as income, and can only deduct losses if you itemize deductions, which roughly 90% of taxpayers don’t. If you take the standard deduction, gambling losses are not deductible at all, meaning you can owe tax on your winning days even in a year you lost money overall. Starting in 2026, a new law (OBBBA) caps deductible losses at 90% of winnings even for itemizers, which deserves its own explanation, covered in a separate post. This is usually the worst outcome for an active trader, which is exactly why it’s worth knowing what to avoid.

Section 1256 contracts, 60/40 (Form 6781). Regulated futures contracts get a special rule: 60% of any gain is taxed at the long-term rate and 40% at the short-term rate, no matter how long you actually held the position. For a short-term trader this is often the cheapest of the four methods by a wide margin. Whether prediction-market contracts legally qualify as “regulated futures contracts” is genuinely disputed among tax professionals, and the actual argument is covered in a dedicated post.

The same trades, four different bills

Here’s a real example, run through all four methods by the same calculation engine. A trader closes six positions in a year: three wins totaling $6,200, three losses totaling $9,450, for a net loss of $3,250.

• Capital gains: a $3,250 loss, but the $3,000 annual cap kicks in. $3,000 is deductible, and $250 carries to next year.
• Ordinary income: the full $3,250 loss, no cap, netted directly.
• Section 1256: the full $3,250 loss, split 60/40 between long- and short-term.
• Gambling, not itemizing: the $6,200 in winning days is still taxable income, and none of the $9,450 in losses can be deducted at all. Net result: tax owed on $6,200 of income in a year the trader actually lost money.

Same trades. A $9,450 swing separates the cheapest and most expensive way to file them. That gap is the entire reason to check all four before you pick one, rather than take whatever your broker’s default export happens to assume.

What actually determines which one applies to you

It’s a characterization question, not a free choice, and the honest answer is that no one, including the IRS, has settled it yet for event contracts specifically. What commonly narrows it down in practice:

• Which platform. Kalshi is a CFTC-designated contract market, which gives the Section 1256 argument real footing there. Polymarket’s original wallet-based platform is not a CFTC-regulated exchange, which makes that same argument weaker, though a newly launched, separately regulated “Polymarket US” venue changes this calculus for anyone trading through it specifically.
• How you trade. Frequent, business-like trading activity leans toward ordinary income treatment in some professionals’ reading; occasional recreational betting leans toward gambling treatment in others’.
• What you can defend on audit. Whichever method you pick, keep your full trade history and be able to show your math. A CPA’s job here isn’t to give you the “right” answer. It’s to help you pick a defensible one and stand behind it.

What to actually do before you file

1. Export your full trade history: Kalshi’s CSV export, Polymarket’s public wallet history.
2. Run it through all four methods and see the real dollar spread for your own trades, not a generic example.
3. Read the caveats attached to whichever method looks cheapest. The cheapest is often the most legally aggressive.
4. Bring the comparison to a tax professional before you file, especially in your first year trading these platforms.