Nobody Knows How to File Taxes on Prediction Market Wins
How do you do declare taxes on forecast market profits? This seems like the kind of simple question that any half-decent accountant should be able to answer. But right now, it’s a headache for tax professionals across the country. “You have a void of direction,” says Patrick Camuso, an accountant specializing in digital assets. “It puts the taxpayer in a bad position.”
Prediction markets have been around for decades, so this is not a new problem. But platforms like Kalshi and Polymarket have exploded in popularity since last year, meaning the question of how to properly factor in forecast market gains has gone from a niche concern to something far more pressing for many people. Even though only a small portion of the population actually uses the markets — about 3 percent, according to a recent survey — that still means millions of U.S. residents are forced to report their gains and losses to the Internal Revenue Service. There’s a lot of money at stake here. Kalshi, whose user base is predominantly American, recorded a monthly trading volume of more than $12 billion last March, according to market tracker Defi Rate.
Kalshi declined to comment. The IRS and Polymarket did not respond to requests for comment.
The IRS has not issued official guidance on how to approach prediction markets, meaning people who have used these platforms now have to navigate their way through tax season hoping they don’t inadvertently break the law. There are several potential ways to report wins and losses; some people have a law governing tax reporting on financial derivative products (such as futures and foreign exchange contracts). Others treat their market winnings predictions as they would gambling winnings or simply report them as regular income and cross their fingers. Capuso describes prediction markets as “a mix of betting, derivatives and investment contracts all mixed into a single package” and says he assesses what clients owe on a case-by-case basis. “Our firm generally takes a more conservative stance toward most of its clients due to the ambiguity surrounding many tax rules. »
For traders who report profits from prediction markets as gambling winnings, the process can be onerous. Punters must track their winnings ‘per session’, meaning that instead of reporting a net amount, a full record of each bet must be kept. Nate Meininger, a Phoenix-based prediction market trader, joked on X that the lack of guidance meant you didn’t have to report income. In real life, however, he says he earns by reviewing tax documents offered by platforms like Kalshi and consulting an accountant. “I don’t monitor it myself,” he said. “That seems like a lot of work.”
US-based prediction market traders who access Polymarket and other crypto platforms using virtual private networks find themselves in a particularly tricky situation because the company does not issue tax documents (and because they are legally prohibited from using unlicensed platforms). Since U.S. citizens are required to report their income regardless of its source, traders who purchase contracts on Polymarket and its ilk must self-report their income. “Offshore trading is more difficult,” says Meininger.
Changes at the IRS could make things even more difficult. The tax agency is in the midst of a significant overhaul, with modernization efforts led by officials in the so-called Department of Government Effectiveness. It is currently implementing more sophisticated strategies to identify taxpayers for audit; Last year, the IRS paid Palantir $1.8 million to improve a custom tool designed to flag “high-value” audit cases, as WIRED recently reported.
