US Tax Experts Struggle to Agree on How to Tax Prediction Market Winnings

Tax professionals across the United States are divided on how users of prediction market platforms such as Polymarket and Kalshi should report their earnings. The Internal Revenue Service (IRS) has not issued any official guidance on the matter, leaving taxpayers navigating a regulatory gray zone.

A Guidance Vacuum With No Clear Solution

According to Wired, Patrick Camuso, an accountant specializing in digital assets, described the current landscape as a "guidance vacuum" that puts taxpayers at a disadvantage. Without clear instructions from the IRS, prediction market participants must choose their own reporting method — each carrying distinct risks.

Some professionals apply rules governing financial derivatives. The platforms themselves maintain that they offer financial contracts regulated by the CFTC. Others treat prediction market profits as gambling winnings, while some simply declare them as ordinary income. Camuso characterized these platforms as a "mix of wagers, derivatives, and investment contracts."

His firm evaluates tax obligations on a case-by-case basis, generally adopting a conservative stance due to the ambiguity surrounding many existing tax rules.

Why This Matters

Prediction markets have experienced explosive growth, with monthly trading volumes on such platforms previously surpassing $20 billion. The lack of regulatory clarity creates serious challenges for millions of users who are legally required to report income to tax authorities but have no clear framework for doing so. Choosing the wrong reporting method could result in penalties or significant overpayment.

Reporting earnings as gambling winnings represents the most burdensome approach. Rather than declaring a net figure, taxpayers must account for each individual bet and track winnings on a "per-session" basis.

Section 1256: A Potential Alternative

There is another option — treating prediction market contracts as instruments under Section 1256 of the US Internal Revenue Code. CNBC sources previously noted that under this framework, gains or losses are taxed using a 60/40 formula regardless of the holding period: 60% is treated as long-term capital gain (or loss) and 40% as short-term.

Trader Nate Meininger offered a tongue-in-cheek take on the situation:

"If you're wondering how to file your taxes for your prediction market income, you don't. You don't file it. The IRS isn't telling us how to file it because they don't want us to. Thank me later and follow me for more good tax advice" — Nate Meininger (@NathanMeininger), original post

Despite the humor, Meininger admitted he actively reviews Kalshi's tax documentation and consults with an accountant, though he called the entire process "too much of a hassle."

Offshore Platforms Complicate Matters Further

The situation is particularly difficult for US citizens who use VPNs to access Polymarket and other crypto-based platforms. These services do not provide tax documentation, and it is technically illegal for American residents to use unlicensed platforms. Yet US law requires citizens to declare all income regardless of source — forcing traders to handle record-keeping entirely on their own.

Wired journalists note that the ongoing large-scale IRS reorganization could make things worse. The tax agency is undergoing a modernization process, with parts of it being managed by operatives from Elon Musk's DOGE.

In early April, CFTC Chairman Michael Selig urged regulators to expedite clear rules for prediction markets. He warned that without proper regulation, companies would flee to offshore jurisdictions and investors could face an "illusion" reminiscent of the FTX collapse.