Can You Change How You Report Prediction Markets From One Year to the Next?

We know of no rule that flatly bars reporting prediction markets differently next year, but the four treatments aren't a menu you pick from annually. Each one is a claim about what the contract legally is. If your view changes, you can file the new way, but you should have a reason beyond the lower bill, and you should ask whether the old returns were wrong. A pure change of character generally isn't an accounting method change needing Form 3115, though a change that alters timing may be, and no guidance addresses this for event contracts.

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.

These are classifications, not elections

If a contract is a Section 1256 contract, the 60/40 and year-end rules apply because of what it is. You don't opt in. The same goes for wagering under §165(d). The law has one answer for a given contract. We just don't know it yet.

The real election in this area is §475(f), for traders in securities or commodities, and it has its own deadlines and consent rules.

Does anything require consistency?

Three separate ideas get mixed up here.

Each year stands alone. The tax is assessed on annual returns for fixed accounting periods, so one year's return doesn't decide the next year's.

The IRS isn't bound by your past treatment. The Supreme Court has held that estoppel doesn't stop the Commissioner correcting a mistake of law. An old return that was accepted doesn't prove the treatment was right.

The duty of consistency can bind you. A Chief Counsel memo describes three elements: you reported an item one way in one year, the IRS relied on that, and you try to change after the statute of limitations for the first year has closed, to the government's detriment. Courts differ on the details, and that memo isn't precedent. The practical point is that switching to get a benefit that depends on a closed year is the risky pattern. Switching treatment for a new year's trades is a different thing.

Accounting method or character?

Form 3115 is for accounting method changes, and Treas. Reg. §1.446-1(e)(2)(ii) defines the line. A method change involves a "material item", meaning any item that involves "the proper time" for including income or taking a deduction. The regulation adds that a change doesn't include adjusting an item that doesn't involve the proper time. Its example is an item deducted as salary that was really a dividend.

Applying that to the common switches is our reading, not IRS guidance:

Because a timing change can carry adjustments between years, a move into Section 1256 or §475 deserves a preparer's review before you file. Trader status covers the §475 calendar.

What carries across a switch

• Capital loss carryovers stay capital. They keep their short-term or long-term character. If you move to other income or gambling, a carryover has nothing in that activity to offset. It still works against other capital gains and up to $3,000 of ordinary income a year.
• Gambling losses don't carry. There is nothing to bring forward under that treatment.
• Open positions need a clean cutover. Keep the cost of anything held across December 31. If you moved to Section 1256, the year-end mark sets a new reference point, and the same gain must not be counted twice.

Why people want to switch, with numbers

The 2026 law change is the usual trigger. For tax years beginning after 2025, §165(d) allows only 90% of wagering losses, up to winnings.

Say a single filer with wages normally takes the $16,100 standard deduction. In 2026 she has $40,000 of profit on winners and $34,000 of losses on losers, so $6,000 net.

This assumes no other itemized deductions. The gap explains the appeal of moving off gambling, and also why it looks results-driven if the only change is the bill. The difference between a defensible change and a weak one is the reason you can write down. For the treatments, see the 90% limit.

Defensible reasons to change

• New authority. The IRS issues guidance or a court decides the point.
• Different facts. You moved venues, or to a different kind of contract. Polymarket's on-chain tokens and a Kalshi contract aren't the same instrument, so different answers aren't automatically inconsistent.
• Better analysis. You and a preparer concluded the old position was wrong.

The third reason has a consequence. If the old treatment was wrong, the earlier open years were wrong too. You'd generally consider Form 1040-X for those years, not just a fresh start. See how to amend.

A practical sequence

1. Compare the result under each treatment. Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup.
2. Write down why the new treatment fits the contracts, without reference to the tax saved.
3. Decide whether earlier open years need amending.
4. List carryovers and open positions at the cutover date.
5. Have a preparer confirm whether any part of the change affects timing.
6. Consider disclosure if the amounts are large.

FAQ

Can I use capital for Kalshi and gambling for sportsbooks?

Those are different products, so different treatment can be coherent. Sportsbook bets are wagers in the ordinary sense. Whether event contracts are is the open question.

Do I have to tell the IRS I changed?

No form exists just to announce a change of character. Form 3115 applies only if it's an accounting method change. Disclosure on Form 8275 is a penalty decision.

Can I switch back later?

Nothing specific prevents it, but repeated switching with no change in facts is hard to explain. Only one treatment can be right for the same contract.

What happens if the IRS issues guidance?

It would depend on the terms, including whether it applies only going forward. Nobody can say more until it exists.