How are you? file tax on profits from the prediction market? It seems that any halfway decent accountant should be able to answer this uncomplicated question. But it’s currently a conundrum for tax experts across the country. “You have no guidance,” says Patrick Camuso, an accountant specializing in digital assets. “It puts the taxpayer in a bad position.”
Prediction markets have been around for decades, so this isn’t a fresh problem. However, since last year, the popularity of platforms like Kalshi and Polymarket has skyrocketed, which means that the issue of correctly accounting for profits in the forecast market has ceased to be a niche problem and has become something much more urgent for many people. Although only a compact part of the population actually uses markets – according to a last survey— this still means that millions of U.S. residents are required to report their profits and losses to the Internal Revenue Service. There’s a lot of money at stake here. Kalshi, which has a primarily American user base, has seen over $12 billion according to monthly trading volume in March last year, according to market monitor Defi Rate.
Kalshi declined to comment. The IRS and Polymarket did not respond to requests for comment.
The IRS has not issued official guidance on how to approach prediction markets, which means that people using these platforms must now wade through tax season, hoping they are not inadvertently breaking the law. There are several potential ways to report wins and losses; some people apply a law that regulates tax reporting of derivative financial instruments (such as futures contracts and foreign exchange contracts). Others treat their earnings from the prediction market the same as gambling winnings, or simply report them as regular income and cross their fingers. Capuso describes prediction markets as “a combination of bets, derivatives and investment contracts in one unique package” and says it evaluates clients’ liabilities on a case-by-case basis. “Our company generally takes a more conservative stance with most clients due to the ambiguity of many tax laws.”
For traders who report earnings from prediction markets as gambling winnings, this process can be cumbersome. Players must follow their winnings on a ‘per session’ basis, meaning that rather than stating the net amount, correct records of each bet must be kept. Nate Meininger, a forecast trader based in Phoenix, joked on X that the lack of guidance means you don’t have to declare income. In real life, however, he says he reports profits by reviewing tax documents offered by platforms like Kalshi and consulting with an accountant. “I don’t follow it myself,” he says. “It seems like a lot of work.”
US-based forecast traders who access Polymarket and other cryptocurrency-based platforms using virtual private networks are in a particularly arduous situation because the company does not issue tax documentation (and because it is legally prohibited from using unlicensed platforms). Because U.S. citizens are required to report income regardless of its source, traders purchasing contracts on Polymarket and its peers must self-report their earnings. “Foreign exchanges are more difficult,” Meininger says.
Changes to the IRS could complicate matters further. The Internal Revenue Service is undergoing a significant overhaul, and some of the modernization efforts are being led by employees of the so-called Department of Government Efficiency. It now employs more sophisticated strategies to determine which taxpayers should be audited; as WIRED recently reported, the IRS paid Palantir $1.8 million last year to improve a custom tool designed to flag “high-value” audit cases.