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Prediction-market winnings are generally taxable income in the United States. The difficult question is not whether to report profitable activity, but which federal tax framework applies. The Internal Revenue Service has gambling rules, while some event contracts could potentially fit the Section 1256 financial-contract rules. No IRS ruling, notice, or regulation located for this topic settles that classification. Your filing depends on the contract terms, venue, settlement method, trading activity, and your own tax facts.
What prediction-market contracts are
Prediction markets let participants trade contracts tied to future events. A contract may pay a stated amount if an outcome occurs and little or nothing if it does not. The Commodity Futures Trading Commission (CFTC) says U.S. prediction markets date to 1988 and have been regulated by the CFTC since 2004. It also says federally regulated markets can operate under federal law in all 50 states.
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CFTC oversight answers a market-regulation question, not automatically an income-tax question. A venue’s regulatory status does not by itself determine whether every event contract is gambling, a Section 1256 contract, a capital asset under another provision, or something else.
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Do not treat a missing tax form as proof that your profits are tax-free. IRS Topic 419 states: “Gambling winnings are fully taxable and you must report the income on your tax return.” It also requires reporting gambling winnings that are not shown on Form W-2G. That rule directly applies when the activity is treated as gambling; the IRS has not issued prediction-market-specific classification guidance identified here.
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Taxable income can arise from settled contracts, sales before settlement, distributions, or other transactions, depending on the adopted classification. Keep enough records to calculate activity rather than reporting only money withdrawn from a platform. A withdrawal can include your original deposits, while a profitable position may remain on the platform.
The two principal federal tax frameworks
Gambling treatment
If event-contract activity is treated as gambling, IRS Topic 419 generally points to reporting winnings as taxable income on your individual return. Gambling losses are not an unrestricted offset. The IRS says an individual may deduct losses only when itemizing on Schedule A, only to the extent of gambling income reported, and only with adequate records. The loss deduction cannot exceed the reported gambling winnings.
This framework can produce an unfavorable result for someone with large gross winning transactions and substantial losing transactions who takes the standard deduction or lacks contemporaneous records. It also does not turn losses into a general business deduction merely because trading was frequent.
Possible Section 1256 treatment
Publication 550 describes Section 1256 contracts as generally subject to annual mark-to-market accounting. A contract held at year-end is generally treated as sold at fair market value on the last business day of the tax year. The resulting gain or loss is split 60% long-term and 40% short-term, regardless of how long the contract was held.
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Qualifying Section 1256 contracts are reported through Form 6781, with the net result carried to Schedule D. Publication 550 describes a regulated futures contract as one whose margin depends on daily market conditions and that is traded on, or subject to the rules of, a qualified board of exchange. Whether a particular prediction-market contract meets those requirements is a fact-specific legal question, not an automatic consequence of CFTC involvement.
The Section 1256 approach may require recognizing an unrealized year-end gain or loss. It can therefore differ sharply from a cash-only view based on contracts that have already settled. Do not adopt this treatment without confirming that the contracts qualify.
Why classification remains unsettled
Tax analyses published in 2026, including a June 16, 2026 Thomson Reuters analysis, describe prediction-market tax treatment as unresolved and caution that Section 1256 eligibility is not automatic. The IRS materials identified for this subject contain no ruling, notice, or regulation specifically classifying prediction-market event contracts.
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There is no single tax answer for all political, sports, economic, weather, or other contracts, and no uniform answer for every platform. Relevant facts can include:
- the contract’s written terms and payout formula;
- whether it can be traded before the event settles;
- how margin, collateral, and daily valuation operate;
- the exchange or venue’s legal status and governing rules;
- whether the contract is listed on or subject to a qualified board of exchange;
- your volume, holding periods, hedging, and other trading activity; and
- your residence, filing status, and state tax rules.
A Form 1099-B, Form W-2G, Form 1099-MISC, or no form does not by itself establish the correct tax character. Information returns are evidence to reconcile, not a substitute for classification analysis.
How to prepare your return
- Download complete records. Obtain annual activity, transaction, settlement, fee, deposit, withdrawal, and account statements from every platform. Save files before the platform’s retention period expires.
- Reconcile the ledger. Match each purchase, sale, settlement, fee, transfer, and cash movement. Separate returned principal from gains. Identify positions still open on December 31 and record their quantity and stated value.
- Check information returns. Note every Form 1099-B, W-2G, 1099-MISC, or other statement. Reconcile reported amounts to your own transaction history. If no form arrived, continue the calculation; the absence of a form does not remove a reporting obligation.
- Document the classification decision. Ask a qualified tax professional to analyze the contracts and venue under current law. Request written support for treating the activity as gambling, Section 1256 contracts, capital transactions, or another category.
- Use matching forms. Gambling treatment generally involves Form 1040 and Schedule 1 for winnings; allowable gambling-loss deductions are claimed on Schedule A when you itemize. Section 1256 treatment generally uses Form 6781 and Schedule D. Your preparer may need additional forms for a business, partnership, corporation, or nonresident return.
- Plan payments. Additional income can increase withholding needs and estimated-tax obligations. IRS Topic 419 advises that estimated tax may be required on additional gambling income. Review safe-harbor rules and payment dates with your preparer rather than waiting for the filing deadline.
Records you should keep
Maintain records that allow another person to reconstruct every reported figure. Keep:
- trade confirmations showing contract, direction, quantity, price, and timestamp;
- deposits, withdrawals, transfers, and account-opening information;
- commissions, platform fees, financing charges, and other costs;
- settlement notices and payout calculations;
- daily or periodic account statements;
- open-position reports and fair values at December 31;
- copies of all tax forms received; and
- a written explanation of your tax classification and calculations.
The 2025 Form 1099-B includes fields for profit or loss realized on closed contracts, unrealized profit or loss on open contracts at the prior and current year-end, and aggregate profit or loss on contracts. Those fields make year-end statements particularly important, even when the form does not match the treatment your adviser ultimately adopts.
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| Issue | Gambling framework | Section 1256 framework |
|---|---|---|
| Authority | IRS Topic 419, if activity is gambling | Internal Revenue Code and Publication 550, only if contracts qualify |
| Year-end open positions | Not generally marked to market under the Topic 419 rule | Generally treated as sold at fair market value on the last business day |
| Character | Gambling winnings; loss deduction is separately limited | 60% long-term and 40% short-term capital gain or loss |
| Loss rule | Itemized deduction, limited to reported gambling income, with records | Capital-loss rules apply after Form 6781 computation |
| Typical forms | Form 1040/Schedule 1; Schedule A for allowable losses | Form 6781 and Schedule D |
| Information returns | Form W-2G may or may not be issued | Form 1099-B may report closed and unrealized contract amounts |
| Certainty for event contracts | Applies only if the contracts are legally treated as gambling | Qualification is unresolved and fact-specific |
| State tax | State treatment was not established by the federal sources discussed; check your state’s rules | |
Common mistakes and how to avoid them
Reporting only withdrawals
Withdrawals do not equal taxable profit. Reconcile the full account history, including contracts bought with existing balances and gains left on the platform.
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Assuming a regulated venue guarantees Section 1256 treatment
CFTC regulation concerns market legality and supervision. It does not, standing alone, prove that a contract satisfies every Section 1256 requirement.
Netting everything without classification support
Combining winning and losing positions into one informal number can produce the wrong result under either framework. Preserve transaction-level data and let the selected tax treatment determine the computation.
Ignoring open contracts at year-end
Open positions can matter under mark-to-market rules and can also affect the accuracy of information returns. Capture December 31 statements even if a contract settles months later.
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Under the IRS gambling framework, losses require itemizing, adequate records, and a deduction no larger than reported gambling income. A losing year does not automatically create a deductible tax loss.
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When professional advice is especially important
Obtain individualized advice before filing if gains or losses are material, you traded on multiple platforms, you have substantial open positions, you traded through a business or entity, you are a nonresident or moved between states, or you intend to claim Section 1256 treatment. Give the adviser the contracts’ legal terms, venue rules, complete ledger, year-end statements, and every information return.
Answers to common questions
How do I pay taxes on prediction-market winnings?
First determine the defensible federal classification, then report the resulting amount on the forms for that treatment. Set aside cash during the year and consider estimated payments when gains materially increase your tax liability.
Are profits taxable if I did not get a 1099?
Yes, potentially. The IRS requires reporting taxable income even when no information form is issued.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallDo gains go on Schedule D or Schedule 1?
That depends on classification. Gambling treatment generally points to Schedule 1, with qualifying losses on Schedule A; Section 1256 treatment generally flows through Form 6781 to Schedule D.
Can I deduct prediction-market losses?
Under gambling treatment, only as an itemized deduction up to reported gambling income and only with records. Other treatment follows different capital-loss rules.
Are event contracts Section 1256 contracts?
Some may potentially qualify, but no blanket rule establishes that all prediction-market contracts do. Contract and venue facts must be analyzed.
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