How a Prediction Market Capital Loss Carryover Works on Schedule D

If you report prediction markets as capital transactions and lose more than the yearly limit, the unused loss carries to the next year and is treated as if it happened then. You enter it on Schedule D, line 6 if short-term or line 14 if long-term, using the Capital Loss Carryover Worksheet. It keeps its character, has no expiry during your life, and first offsets capital gains, then up to $3,000 of other income a year ($1,500 if married filing separately). Only capital treatment and Section 1256 create one. Gambling treatment doesn't.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed. This article explains the options and the sources behind them; a tax professional can tell you which position fits your situation.

The rules in one place

From §1211(b), §1212(b) and Publication 550:

• Limit. Your deduction against other income is the lesser of $3,000 ($1,500 married filing separately) or your net loss on Schedule D, line 16.
• Carryover. The unused part moves to the next year, and the next, until used.
• Character stays. A short-term loss stays short-term and a long-term loss stays long-term.
• Short-term goes first. In figuring the carryover, short-term losses are used before long-term ones, even if they came later.
• Next-year matching. A long-term carryover reduces long-term gains before short-term gains, and short-term carryovers work the same way in reverse.

Most prediction market contracts are held for a year or less, so most of these losses are short-term. Check any contract held for more than a year against the long-term rules.

Step 1: confirm you have a carryover

The Schedule D instructions say you have a carryover to the next year if line 16 is a loss and either that loss is more than the loss on line 21, or your Form 1040 line 15 taxable income would be below zero if the form allowed negative numbers. That second condition matters more than people expect, as Example 2 shows.

Example 1: wages and a big short-term loss

In 2025, Priya has a $40,000 taxable income on Form 1040, line 15. On Schedule D she has an $18,000 net short-term loss on line 7 from Kalshi, and a $1,500 long-term gain on line 15. Line 16 is $16,500 of loss, and line 21 is $3,000.

Here's the worksheet from the 2025 Schedule D instructions, with the years rolled forward one, so it takes 2025 figures to reach 2026. Use the 2026 instructions when they're published, as line references can move.

Her line 15 isn't a loss, so she skips lines 9 through 13. Check: $16,500 net loss minus $3,000 used is $13,500. It goes on the next year's Schedule D, line 6, as a loss.

The next year

In 2026, Priya has a $4,000 short-term gain and a $6,000 long-term gain.

Her 2026 gains are wiped out and she gets a $3,000 deduction, with $500 left. Any capital gain counts here, including stocks or crypto, so the loss is not tied to prediction markets.

Example 2: when the $3,000 isn't really used

In 2025, Leo has $9,000 of wages, a $10,000 short-term loss, and nothing else. After the $3,000 deduction, his AGI is $6,000. The $15,750 standard deduction would take line 15 to negative $9,750.

The whole loss carries over. His income was already covered by the standard deduction, so the $3,000 gave him no benefit and the worksheet doesn't count it as used.

The filing trap

Publication 550 says the allowable deduction reduces your carryover "whether or not you claimed it and whether or not you filed a return". You can't skip reporting a loss year and keep the whole loss for a big gain later. If you never reported it, see fixing a past return. A carryover also has to be right from its first year, so one wrong year moves through all the later ones.

Things that can end or split it

• Death. A capital loss can be deducted only on the decedent's final return, and the estate can't carry it on.
• Marriage. Publication 550 says that if you once filed separately and now file jointly, you combine the separate carryovers.
• Divorce or separate filing. A carryover from a joint return can be deducted only on the return of the spouse who actually had the loss, so track who did.
• A change of treatment. If you later report as gambling or other income, the old carryover stays capital and those results can't absorb it. It can still offset other capital gains and the yearly $3,000. See gambling vs capital gains.

Section 1256 losses

If you report under Section 1256, a net loss reaches Schedule D at 60% long-term and 40% short-term, and the worksheet's normal ordering then applies. An extra three-year carryback election exists, but only against earlier Section 1256 gains.

What to do at year end

Harvesting decisions depend on your carryover, because a carryover already absorbs gains. Look at it before selling anything for tax reasons. See tax loss harvesting.

To see whether a year produces a loss at all, run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. Keep the prior-year Schedule D with your records. You need it to figure each new carryover, so keep it for as long as the carryover is alive, not just for the normal 3-year window.

FAQ

Do I have to use the carryover in the next year?

Yes. It applies automatically in the next year where you have gains or room under the limit. You can't save it for a bigger year.

Can a carryover offset a gambling win?

If you report those winnings as gambling income, no. Capital losses offset capital gains, then only the limited amount of other income.