Prediction-market profits are generally taxable even when a platform does not send a Form 1099. The difficult issue is not whether to report activity, but which federal tax framework applies: gambling, ordinary income, regular capital assets, or Section 1256 contracts. The Internal Revenue Service has not issued definitive guidance classifying binary event contracts, so your forms, tax rates, loss deductions and year-end calculations depend on the position you take and can carry different audit risks.
Start with the rule that applies in every framework: report your income
A missing tax form does not make prediction-market winnings tax-free. The IRS states: “You must report all your gambling winnings as income. This is true even if you don’t get a Form W-2G.” That statement is written for gambling activity, but the broader principle is important: income must be reported based on your own records, not only on a platform statement.
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Some event-contract platforms may issue an annual statement for interest, rewards or other items while omitting a complete transaction-level tax statement for trading. A statement may also summarize deposits and withdrawals rather than your taxable gains. Do not treat a 1099, or the absence of one, as a complete computation of your profit.
This article addresses U.S. federal taxation. State income-tax rules, community-property rules, filing status and professional-trader facts can change the result.
Why prediction-market tax treatment is unsettled
Binary contracts pay a fixed amount if an event occurs and little or nothing if it does not. That economic design resembles a wager, but a contract traded through an exchange can also look like a financial asset. Existing tax law does not contain a definitive IRS ruling that places all prediction-market contracts in one category.
Tax practitioners commonly discuss four possible treatments:
- Gambling: winnings are reported as other income and losses are separately limited.
- Ordinary income: profit is included in income under general principles, with no automatic capital-loss treatment.
- Regular capital assets: each closed or settled contract is treated as a capital disposition reported on Form 8949 and Schedule D.
- Section 1256 contracts: eligible positions are marked to market at year-end and receive a 60% long-term/40% short-term split.
The National Association of Tax Professionals reported in 2026 that the IRS has issued no revenue ruling, notice, private letter ruling or formal guidance directly deciding whether prediction-market event contracts qualify under Section 1256. Consequently, none of these positions should be presented as settled law for every platform or contract. The terms of the specific contract, how it is traded and your facts matter.
Framework comparison
| Possible treatment | Income character | Loss effect | Main forms or schedules | Year-end mark-to-market | Documentation and controversy |
|---|---|---|---|---|---|
| Gambling | Winnings generally reported as other income; rates follow ordinary income brackets | Casual-gambler losses are itemized and limited by gambling income; for tax years beginning after Dec. 31, 2025, usable deductions are effectively capped at 90% of gambling winnings | Other Income on Form 1040; Schedule A for allowable losses | No general mark-to-market rule | Maintain a gambling log, receipts and statements; classification remains contestable |
| Ordinary income | Ordinary income under the position taken | No special capital-loss offset; treatment depends on the applicable authority and facts | Form 1040 reporting location depends on the activity and advice received | Not stated as a general requirement | Requires a well-supported legal position; obtain specialist advice for material amounts |
| Regular capital asset | Short-term or long-term capital gain or loss based on holding period | Capital losses offset capital gains; net loss can reduce other income by up to $3,000 ($1,500 married filing separately), with carryforwards | Form 8949 and Schedule D | No, unless another rule applies | Every disposition must be reconstructed; IRS endorsement for event contracts is not established |
| Section 1256 | 60% long-term and 40% short-term regardless of holding period | Flows through capital-gain and loss rules after Form 6781 calculations | Form 6781, then Schedule D | Generally yes: open contracts treated as sold at fair market value on the last business day of the year | Practitioner-described and unconfirmed for prediction markets; aggressive position risk requires careful documentation |
Gambling treatment: how it works and why 2026 matters
Reporting winnings
Under the traditional casual-gambler approach, report all winnings as “Other Income” on your federal return. Report the gross winnings, not merely the amount you withdrew from the platform. A contract that settled for a profit is income even if the proceeds remain in your account or are later reinvested.
The IRS Summertime Tax Tip 2016-26 says that all gambling winnings must be reported even without Form W-2G. Prediction-market platforms may not use that form for event contracts, so your ledger is especially important.
Claiming losses
Historically, a casual gambler could deduct gambling losses only on Schedule A and only up to the amount of gambling income reported. The deduction is itemized; it does not reduce income dollar-for-dollar for someone who takes the standard deduction.
NATP’s 2026 analysis explains that the One Big Beautiful Bill Act amended Internal Revenue Code Section 165(d) for tax years beginning after December 31, 2025. Usable gambling-loss deductions are effectively limited to 90% of gambling winnings. For example, a taxpayer with $10,000 of winnings and $10,000 of documented losses could be limited to a $9,000 deduction and still show $1,000 of taxable gambling income. The exact result depends on the taxpayer’s itemized deductions and filing year.
Recordkeeping expected for gambling activity
The IRS recommends a contemporaneous gambling log or diary supported by receipts, statements or tickets. For event contracts, record the platform and account, contract identifier, event and outcome, purchase date, quantity, purchase price, fees, sale or close date, settlement proceeds, deposits, withdrawals and account statements. Keep records that tie each entry to the platform’s transaction history.
Regular capital-asset treatment
How a capital position would be reported
Under the commonly discussed capital approach, each closed or settled contract is a disposition. You would generally report the transaction on Form 8949 and transfer totals to Schedule D. The holding period determines whether the result is short-term or long-term: property held one year or less is generally short-term, while property held more than one year is generally long-term.
Use the contract’s acquisition cost, proceeds and directly related fees to calculate the gain or loss. A position that expires or settles at zero still needs a disposition entry supported by the contract outcome and your transaction records.
Capital-loss limits
IRS Publication 550 (2025) states that when capital losses exceed capital gains, the deductible amount is the lesser of the net loss or $3,000 ($1,500 for married taxpayers filing separately). Unused losses carry forward to later years until absorbed, subject to the applicable annual limit.
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This framework can allow prediction-market losses to offset gains from stocks or other capital assets, because the calculation is performed on the combined Schedule D results. It does not mean every event-contract loss qualifies as a capital loss; the classification itself remains unresolved.
Section 1256: the attractive but unconfirmed position
What Section 1256 normally does
IRS Publication 550 explains that a Section 1256 contract held at year-end is generally treated as sold at fair market value on the last business day of the tax year. This is the mark-to-market rule: unrealized gain or loss is recognized even though the contract remains open.
Section 1256 gain or loss is reported first on Form 6781. The net result then flows to Schedule D, with 60% treated as long-term and 40% as short-term regardless of how long the contract was held. The split can produce a lower rate than entirely short-term treatment, but it also accelerates recognition of gains on open positions.
Why event contracts require caution
NATP states that the IRS has not directly decided whether prediction-market event contracts qualify under Section 1256. Applying that treatment is therefore an interpretive position rather than a confirmed classification. If you use it, retain the contract specifications, exchange rules, pricing records, year-end fair-value evidence and a written explanation of why the statutory requirements are met. Discuss the position with a tax professional familiar with derivatives before filing.
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- Export all platform data. Download trade confirmations, settlement histories, fee reports, account statements and annual tax forms, if any. Save copies outside the platform.
- Build a transaction ledger. Give every contract a unique row or identifier. Include platform, account, event, outcome, buy date, quantity, price, fees, closing or settlement date, proceeds and deposits or withdrawals.
- Reconcile cash movement. Compare the ledger with bank transfers and platform balances. Deposits are not income, and withdrawals are not automatically taxable proceeds.
- Choose and document a reporting position. Gambling, ordinary-income, regular-capital and Section 1256 treatments have different forms and loss rules. Do not mix methods casually across identical contracts without a reason.
- Apply the correct forms. Gambling positions generally involve Other Income and, if eligible, Schedule A losses. Capital treatment generally uses Form 8949 and Schedule D. Section 1256 treatment uses Form 6781 before Schedule D.
- Review open positions at year-end. Mark-to-market is generally a Section 1256 feature, not a blanket rule for every prediction-market account. Confirm whether your chosen treatment requires a December 31 valuation.
- Retain support. Keep statements, contract terms, fee schedules, calculations and correspondence for the period required by your tax adviser and applicable record-retention rules.
Can prediction-market losses offset stock gains?
They may under a regular capital-asset position if the contracts are properly reported as capital transactions. Capital losses first offset capital gains, including gains from stocks. If losses still exceed gains, the federal deduction is generally limited to $3,000 per year ($1,500 for married filing separately), with the remainder carried forward.
That result is not available automatically under gambling treatment. Gambling losses are tied to gambling income and claimed as itemized deductions; they do not become stock-market capital losses merely because both activities occurred in the same year. Section 1256 treatment also has its own calculation and documentation requirements.
Common mistakes and how to correct them
“There was no 1099, so I can ignore it.”
Incorrect. Report taxable results from your own ledger. Contact the platform if data is missing, but do not wait for a form that may never arrive.
“I can report only withdrawals.”
Incorrect. Tax generally follows the income-producing transaction, settlement or disposition, not the date you transfer cash to your bank.
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“Every losing contract offsets every winning contract.”
Not necessarily. The ordering and limits differ sharply between gambling and capital frameworks. Under the post-2025 gambling rule, even equal aggregate wins and losses can leave taxable gambling income because only up to 90% of winnings may be deductible.
“All event contracts are Section 1256.”
Unestablished. The IRS has not issued direct guidance deciding that prediction-market contracts qualify. Treating them as Section 1256 without analysis can create an avoidable controversy.
“The platform’s yearly summary is enough.”
A summary may omit contract-level basis, fees, open positions or settlement details. Maintain your own complete ledger and preserve source statements.
When professional advice is warranted
Consult a tax professional before filing when activity is substantial, you traded on multiple platforms, you have large losses, you want to use Section 1256, you operate as a business, you have open contracts at year-end, or state taxation is significant. Ask the adviser to state the classification assumption, explain the loss limitations and identify the forms that will be filed. Keep that analysis with your records in case the position is later questioned.
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State taxes and future changes
This guide covers federal rules only. States may conform to federal treatment, use different definitions, disallow some deductions or tax gambling and capital income differently. Tax law and platform reporting practices can change quickly, including after the 2025 amendment to Section 165(d). Recheck current IRS instructions, state guidance and platform documentation for the tax year you are filing.
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