The Unresolved Tax Puzzle Hanging Over Prediction Market Traders

How exactly should traders file taxes on profits earned from prediction markets? On the surface, this reads like a straightforward question any competent bookkeeper should be able to answer easily. Today, however, it remains an unsolved riddle for tax professionals across the United States.

“There is a complete vacuum of official guidance on this,” explains Patrick Camuso, an accountant who specializes in digital asset taxation. “It leaves taxpayers in a really vulnerable position.”

Prediction markets have existed for decades, so this tax question is not a new problem. But platforms like Kalshi and Polymarket have exploded in mainstream popularity since last year, pushing the issue of proper tax reporting for prediction market gains from an obscure niche concern to a pressing problem for many Americans. While only a small sliver of the U.S. population actually uses these platforms—roughly 3 percent, according to one recent poll—that still adds up to millions of U.S. residents who are legally required to report all prediction market wins and losses to the Internal Revenue Service (IRS).

The sums at stake are substantial. According to market tracker Defi Rate, Kalshi, which serves a predominantly American user base, processed more than $12 billion in monthly trading volume this past March. Kalshi declined to comment for this piece, while the IRS and Polymarket did not respond to requests for comment.

With no official IRS guidance outlining how to classify prediction market earnings, platform users are left to muddle through tax season on their own, hoping they do not accidentally violate tax law. There are several competing approaches taxpayers currently use: some apply existing tax statutes that govern financial derivatives, such as futures contracts and foreign currency trading contracts. Others treat their prediction market gains the same way they would gambling winnings, while many simply report earnings as regular ordinary income and cross their fingers.

Camuso describes prediction markets as a unique hybrid that blends characteristics of wagering, derivatives, and investment contracts all in one, so he assesses each client’s tax liability on a case-by-case basis. “Our firm generally takes a more conservative stance for most clients, given how much ambiguity there is around these tax rules,” he says.

For traders who choose to classify earnings as gambling winnings, the reporting process is particularly burdensome. Gambling income must be tracked on a per-session basis, meaning traders cannot just report a net annual gain or loss—they have to keep a detailed record of every single wager they place. Nate Meininger, a Phoenix-based prediction market trader, has joked on X that the lack of guidance means there’s no requirement to declare the income at all. In practice, however, he reports all his gains by pulling data from tax documents offered by platforms like Kalshi and consulting with an accountant. “I don’t track every bet myself,” he says. “That just seems like way too much work.”

U.S. traders who use virtual private networks (VPNs) to access Polymarket and other crypto-based prediction platforms are in an even trickier spot. Not only do these platforms do not issue official tax documentation, but U.S. users are already legally barred from using unlicensed prediction market services. Since U.S. citizens are required to report all income regardless of its source, traders on Polymarket and similar platforms have to track and self-report all their earnings entirely on their own. “Offshore exchanges are a lot harder to sort out for taxes,” Meininger notes.

Ongoing changes at the IRS may make this situation even more challenging. The tax agency is in the middle of a major overhaul, with modernization efforts spearheaded by staff from the Department of Government Efficiency. It is also rolling out far more sophisticated strategies to identify which taxpayers to audit: as WIRED recently reported, the IRS paid Palantir $1.8 million last year to upgrade a custom tool built to flag “high-value” audit cases.

The current ambiguity around prediction market taxes closely mirrors the confusion that surrounded cryptocurrency tax reporting in the early days of the blockchain boom. The IRS released its first formal crypto guidance in 2014, five years after Bitcoin launched, significantly updated those rules in 2019, and it was not until 2023 that crypto exchanges became legally required to send tax forms to users and report transaction data directly to the IRS. The same pattern of lag between widespread adoption and formal rulemaking appears to be playing out with prediction markets today. In the meantime, many traders are betting that authorities will be lenient toward unintentional reporting mistakes.

“There isn’t really a correct way to file these taxes yet,” Meininger says. “It would be odd for the IRS to expect someone to know something that’s impossible to know.”