'Extremely confusing': How are prediction market winnings taxed? Without guidance from the IRS, it's a little tricky

Kalshi’s Spain–Argentina market alone passed $1.27 billion two days before kickoff — the biggest single market the platform has ever run. Across all platforms, World Cup trading topped $25 billion earlier that week, per Fortune. For scale, the NBA finals drew about $2 billion.

“I think it’s extremely confusing for the users of prediction markets,” Ryan Schutz, a former IRS special agent who now runs First There Tax, told CNBC. Traders, he said, are getting conflicting advice from every direction.

One point is settled: The money is taxable, whether or not a tax form ever shows up. What nobody agrees on is which rules apply — and that stumps even the people who do this for a living.

Alan Cole, a senior economist at the Tax Foundation, told The Wall Street Journal he put $342,195.63, most of his life savings, into a Kalshi bet against DOGE cutting federal spending, and walked away with a profit of about $128,000. But even Cole told Business Insider he can’t be sure whether that money counts as futures income or gambling income, and that he’d welcome clearer IRS guidance.

If Cole, the tax expert can’t figure out his own tax bill, what chance does everyone else have?

Gambling income would be the costliest treatment

Tax experts interviewed by CNBC see three plausible homes for this income in the existing code.

The first is gambling. Winnings would count as ordinary income. Losses would be deductible only against winnings, and only if you itemize, per IRS rules. A fresh complication sits on top: A provision of President Donald Trump’s One Big Beautiful Bill Act lets gamblers deduct just 90 cents of every dollar they lose, effective Jan. 1. Apply that to a trader who finished 2026 flat — $10,000 in winning contracts, $10,000 in losers — and the deduction stops at $9,000. The remaining $1,000 gets taxed even though the trader’s account never grew.

Nathan Goldman, an accounting professor at North Carolina State University, told CNBC that sports betting already sits under some of the worst tax treatment in the code.

Capital gains treatment looks more like stock trading

The second possibility treats each contract as a capital asset. A trader who bought Spain at 59 cents and collected $1 at settlement has a 41-cent gain per contract, taxed at ordinary rates if held under a year and at lower long-term rates if held longer. Losses offset gains, and up to $3,000 of excess losses can reduce ordinary income each year — a far cheaper outcome than the gambling regime for most traders.

The third option is Section 1256, a corner of the tax code written for regulated futures. It splits every gain into two pieces: 60% taxed at long-term capital gains rates and 40% at short-term rates, even on a contract held for a single day.

Kalshi has long argued its event contracts are CFTC-regulated futures, which supports this reading. Whether they actually qualify is contested — several practitioners told CNBC in December they doubt it, and the profession hasn’t settled the question since.

Schutz told CNBC that for the vast majority of filers, capital gains or Section 1256 treatment would produce the smallest bill. One more wrinkle: Kalshi’s newer perpetual contracts, which have no end date, could plausibly land in a different category than its standard event contracts, he said.

A regulatory turf war is keeping the IRS quiet

The Commodity Futures Trading Commission says event contracts are swaps — a category of financial contract under its watch alone — and has sued several states to defend that claim. Others see the same contracts as sports betting that skipped the license.

On July 8, a federal judge in Manhattan denied Kalshi’s bid to block New York from enforcing its gambling laws against its sports contracts, ruling that federal commodities law doesn’t override the state’s authority. Kalshi has appealed to the Second Circuit. A federal appeals court reached the opposite conclusion for New Jersey in April, leaving the question unsettled across the country.

Schutz told CNBC he suspects the agency is holding back because any tax ruling could clash with the CFTC’s legal position. There is no timeline for a resolution, and no signal that guidance will arrive before the 2026 filing season.

A 1099 might arrive, but it won’t settle anything

Both Kalshi and Polymarket give users a Form 1099 to report activity, CNBC reported, though neither platform would comment on what role it should play in helping traders understand their tax obligations. That characterization is contested. Kalshi, a CFTC-regulated exchange, issues a partial 1099-B covering gross proceeds but does not calculate cost basis, according to Camuso CPA.