Prediction markets are generating billions of dollars in trading activity, but the cash left in a trader’s account at year-end may not tell the full tax story. Across Kalshi and Polymarket’s two platforms, the market volume reached approximately $50.6 billion in July 2026.
This is critical because the One Big Beautiful Bill Act (OBBBA) limits wagering-loss deductions to 90% of qualifying losses. If a taxpayer’s prediction market activity is treated as wagering, the taxpayer could report winnings as income, reinvest the proceeds, and later incur losses that may not be fully deductible under the 90% limitation.
This creates a potential mismatch between taxable income, deductible losses, and the cash a trader actually has left.
Key Takeaways
- Reinvesting prediction market winnings does not automatically defer taxes, even if those funds are later lost.
- The OBBBA’s 90% loss deduction cap could create taxable income beyond a trader’s actual economic profit.
- Kalshi and Polymarket may have different tax implications, particularly because Polymarket involves digital assets.
Reinvesting Winnings Does Not Automatically Defer Tax
A trader does not generally avoid tax simply by leaving proceeds on a trading platform or immediately putting them into another position. The relevant question is whether the transaction created taxable income or gain under the rules governing that particular contract.
For example, a trader could realize $20,000 from winning contracts and immediately use the proceeds to open new positions. If the original transaction is taxable, reinvesting the money does not automatically eliminate the resulting tax liability.
The treatment of subsequent losses is a separate question. A trader who later loses the reinvested funds cannot use those losses to offset the previous winning. It often depends on whether the activity is treated as wagering, a capital transaction, a qualifying derivative, or another form of taxable activity.
How the 90% Rule Could Create a Tax Mismatch
Traditionally, gambling rules require U.S. taxpayers to report gambling winnings as income. The 90% limitation is most relevant to taxpayers who are otherwise eligible to claim wagering losses as an itemized deduction. Taxpayers who do not itemize generally cannot claim the deduction at all.
Moreover, the IRS states that the deduction is limited to the lesser of 90% of gambling losses or gambling winnings.
Assume a trader has $100,000 of qualifying wagering gains and $90,000 of qualifying wagering losses, and is eligible to claim an itemized deduction. If the 90% limitation applies, the deductible loss would be $81,000. The trader would therefore have $19,000 of wagering income for federal tax purposes, despite an economic net gain of $10,000.
This can create what traders may view as “phantom” taxable income: a tax result that is higher than expected based on the trader’s economic profit or loss.
Polymarket and Kalshi Add Different Tax Questions
Polymarket uses pUSD, an ERC-20 token backed 1:1 by USDC, as collateral while trades settle in USDC. Because Polymarket uses a digital-asset-based settlement structure, traders may also need to review whether a sale, exchange, or other disposition of USDC or pUSD creates a separate digital asset tax issue.
The IRS treats stablecoins as digital assets, but the tax result depends on the transaction, fair market value, and adjusted basis. Therefore, traders may need to consider both the tax treatment of the underlying prediction market position and any separate taxable event involving the digital asset used to fund or settle the transaction.
Kalshi presents a different tax question. The platform describes its event contracts as financial derivatives traded on a CFTC-regulated exchange. However, the regulatory status does not automatically determine federal income-tax treatment.
The applicable tax treatment depends on the contract and the Internal Revenue Code provisions that apply. That distinction matters because traders should not assume that every Kalshi contract automatically receives the same capital-gains treatment.
How Each Platform Handles Tax
According to Kalshi, users who meet applicable IRS reporting thresholds may receive Form 1099-INT for interest, Form 1099-MISC for credits or rewards, Form 1099-B for certain crypto-transfer proceeds, and Form 1099-DA for specified digital-asset transactions through ZeroHash.
However, a tax form does not determine how a transaction is taxed. Moreover, the IRS requires taxpayers to report taxable digital-asset transactions even when they do not receive a Form 1099-DA.
The platform also provides a profit-and-loss statement covering trading activity, fees, and rebates.
In contrast, Polymarket’s international platform and Polymarket US operate as separate products, so traders should not assume that their reporting or transaction structures are identical.
What This Means For Prediction Market Traders
Traders should maintain complete records of contracts, settlements, fees, deposits, withdrawals, and any digital assets used in their transactions. The IRS identifies sales, exchanges, and other dispositions as relevant transactions. A transfer between wallets controlled by the same taxpayer should not be described as taxable without specific guidance for the transaction.
The key issue is determining how each type of contract is treated for federal tax purposes. Platform tax forms can help reconcile activity, but they do not replace the taxpayer’s responsibility to report taxable transactions correctly.
Bottom Line
Prediction market traders could face a higher tax bill than their actual economic gains suggest if wagering rules apply to their activity. The OBBBA’s 90% limit on wagering-loss deductions can leave part of qualifying losses non-deductible, creating taxable income even when traders have little or no cash left from their winnings.
With Polymarket introducing digital-asset tax considerations and Kalshi offering contracts with potentially different tax treatment, traders should not assume that platform balances or tax forms alone reflect their federal tax liability.
image credit: Author
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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