IRS silence leaves prediction market traders guessing on tax bills
The Internal Revenue Service has not issued clear guidance on how prediction market profits should be reported, leaving Kalshi and Polymarket traders uncertain whether winnings are treated as ordinary income, capital gains, or gambling income. A Benzinga analysis warns that wagering tax rules could produce higher tax bills than standard capital-gains treatment. Without IRS rules specific to event contracts, participants must navigate existing tax frameworks that may not cleanly apply to prediction market outcomes.
The tax ambiguity forces every active trader to make a reporting bet with real penalty risk. Choose capital-gains treatment and the IRS may reclassify later, triggering back taxes, interest, and accuracy-related penalties. Call it gambling income and you may overpay; claim ordinary business income and you invite scrutiny without clear precedent. Platforms bear indirect costs too: customer-support volume rises, retention falls, and any eventual IRS ruling that invalidates prior filings becomes a class-action target.
The revenue argument gives Congress a fresh lever if it moves to impose dedicated levies on event-contract trading. For traders earning real returns in 2026, the absence of guidance is not a safe harbor; it is a liability that compounds with every profitable trade they cannot cleanly document. A single IRS ruling could retroactively reshape every open position.
Tax uncertainty joins promotional language crackdowns and insider-trading warnings as the third front where Congress and regulators are gaining leverage over Kalshi and Polymarket's event-contract expansion.