US Taxpayers Face Uncertainty in Reporting Prediction Market Winnings to IRS

Prediction markets, which allow users to bet on future events, have existed for decades. Platforms including Kalshi and Polymarket experienced growth in popularity starting in 2023. This rise has increased the number of US users needing to report gains and losses to the Internal Revenue Service (IRS) for tax purposes.

A recent poll indicated that about 3 percent of the US population uses prediction markets. This figure represents millions of residents required to file reports with the IRS. Kalshi, with a primarily American user base, recorded over $12 billion in monthly trade volume in March 2024, according to data from markets tracker Defi Rate.

The IRS has not released official guidelines on taxing prediction market activities. Users must therefore determine reporting methods based on existing tax rules. Kalshi declined to comment on the matter, and neither the IRS nor Polymarket responded to inquiries.

Some individuals treat prediction market gains as financial derivatives, similar to futures or foreign currency contracts.

Others classify them as gambling winnings or as ordinary income. Tax professional Capuso described prediction markets as a combination of wagering, derivatives, and investment contracts, assessed case by case. " — Capuso (Wired) For those reporting as gambling winnings, records must be maintained on a per-session basis, tracking each wager individually rather than netting amounts.

Nate Meininger, a prediction market trader based in Phoenix, consults tax documents from platforms like Kalshi and works with an accountant for reporting. He stated that self-tracking appears time-consuming.

traders accessing crypto-based platforms like Polymarket, often via virtual private networks, face additional hurdles.

These platforms do not provide tax documentation and are unlicensed for US users. US citizens must self-report income from any source, regardless of platform location. Meininger noted that offshore exchanges present greater difficulties.

The IRS is undergoing modernization, including efforts to enhance audit selection. 8 million to improve tools for identifying high-value audit cases.

The current lack of guidance on prediction markets parallels early uncertainties with cryptocurrency taxation.

The IRS issued initial crypto guidance in 2014, updated it in 2019, and required exchanges to report transaction data starting in 2023. Meininger remarked that no established filing method exists yet for prediction markets. Affected parties include the millions of US prediction market users, tax professionals, and the IRS.

Potential next steps involve the IRS developing specific rules, similar to those for crypto. Until then, users risk non-compliance through varied reporting interpretations.