Gambling vs Capital Gains for Event Contracts: How the Tax Treatment Changes What You Owe

Whether event contracts are taxed as gambling or as capital gains can change your federal tax bill by thousands of dollars on the same trades. Capital treatment taxes your net profit and lets losses carry forward. Gambling treatment taxes gross winnings and, from 2026, lets you deduct only 90% of losses, and only if you itemize. The IRS has not said which applies to Kalshi, Polymarket or other prediction markets.

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

Below: the four treatments side by side, three worked scenarios on 2026 rules, the standard deduction trap, and a short note on state taxes. For the background on why this is unsettled, see are prediction market winnings taxable?

The four treatments side by side

Deep dives: Section 1256 and prediction markets and the 2026 gambling loss 90% limit.

Why the classification is genuinely uncertain

Arguments for gambling: many contracts are on sports, elections and entertainment; you stake money on an uncertain event; and in August 2026 the Ninth Circuit reportedly held that federal commodities law likely does not preempt Nevada's gambling regulation of Kalshi's sports contracts. The IRS's general gambling page lists winnings from many forms of wagering as taxable (IRS Topic 419).

Arguments for capital asset: contracts are transferable property you can sell before resolution; they trade on order books on CFTC-regulated exchanges (Kalshi, Polymarket US) or as crypto tokens (Polymarket's international exchange), and crypto is property under Notice 2014-21. The Third Circuit (April 2026) reportedly treated Kalshi sports contracts as swaps under federal jurisdiction. Nothing in §1221 obviously excludes them.

Court cases about state gambling law and CFTC jurisdiction don't decide federal income tax. CPA Robert Green suggests contracts may not all belong in one category: event-driven contracts (sports, elections) look more like wagers, while market-linked contracts (CPI, rates, crypto prices) look more like trading (Green Trader Tax).

How "winnings" and "losses" are measured under gambling treatment

Gambling treatment needs gross winnings and gross losses, not just a net. The IRS has long accepted a session approach for some gambling (netting within a session), but no rule says what a "session" is for event contracts. A reasonable, but unofficial, approach is one session per market: a market you closed at a profit is a winning, a market you closed at a loss is a loss. OddsFile uses this per-market approach in its gambling estimate and flags it as an assumption. Counting per trade instead of per market would inflate both numbers and make the 90% limit worse.

Three worked scenarios (tax year 2026)

Assumptions for all three: single filer, 24% ordinary rate, 15% long-term rate, 2026 standard deduction of $16,100 (IRS), no other itemized deductions, all positions held under a year, no positions open at year end. "Extra tax" is the federal tax caused by prediction-market activity, compared with the same person having no trading. These are estimates that ignore state tax, NIIT and phase-outs.

Scenario 1: Net winner

Winning markets +$40,000, losing markets −$25,000, net +$15,000.

Gambling treatment more than doubles the tax on a $15,000 profit, because $40,000 of gross winnings is taxable while only $6,400 of the loss deduction actually helps beyond the standard deduction.

Scenario 2: Break-even with large volume

Winning markets +$60,000, losing markets −$60,000, net $0.

This is the 90% rule's sharpest edge: tax on a year with zero profit. Before 2026, an itemizer could deduct 100% of losses up to winnings and owe nothing. See the 2026 gambling loss 90% limit.

Scenario 3: Net loser

Winning markets +$10,000, losing markets −$30,000, net −$20,000.

A trader who lost $20,000 can owe $2,400 under gambling treatment, or carry $17,000 of losses forward under capital treatment. That gap is why loss utilization usually matters more than the rate. More in are Polymarket losses tax deductible? and Kalshi losses.

The standard deduction trap

Gambling losses are an itemized deduction on Schedule A line 16. If your total itemized deductions don't exceed the standard deduction ($16,100 single, $32,200 married filing jointly, $24,150 head of household for 2026), you take the standard deduction and your gambling losses do nothing. Your gross winnings still land on Schedule 1 line 8b in full.

Gross winnings also raise your adjusted gross income, which can affect things tied to AGI: phase-outs of credits, Medicare premium surcharges (IRMAA) and some state taxes. Capital and other-income treatments put only the net in AGI.

Is Polymarket taxed as gambling or capital gains?

Polymarket's international exchange adds a crypto layer: outcome tokens are on-chain tokens bought and sold for USDC, and the IRS treats digital assets as property (IRS digital assets). That fact pattern is why many practitioners lean toward capital treatment for Polymarket, reporting disposals on Form 8949 in the digital asset boxes. It is not settled, and sports or election markets on Polymarket raise the same wager-like arguments as anywhere else. See Polymarket taxes: the complete guide.

Kalshi's contracts are not crypto tokens but CFTC-regulated contracts, which is why Section 1256 is argued there and not for Polymarket's international exchange. See Kalshi taxes and the 1099.

A note on state taxes

States start from federal income but often depart from it on gambling. Some states don't allow gambling losses at all, and states that don't automatically conform to the federal code may not adopt the 90% limit, or may adopt it on their own schedule. Capital gains are generally taxed as ordinary income by states. Check your state's rules, or see prediction market state taxes.

What to bring to your tax professional

1. A full trade history across every venue and wallet, including fees and settlements.
2. Per-market results: total winnings and total losses, not just the net.
3. Holding periods (for capital treatment) and year-end prices of open positions (for 1256).
4. Every form you received: Kalshi's 1099s and P&L statement, any 1099-DA, W-2G.
5. An estimate under each treatment, so the decision is made on numbers.

OddsFile produces all five from your Kalshi, Polymarket and Hyperliquid activity. Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. You can also estimate by hand with our calculator guide.

FAQ

Are prediction markets gambling for tax purposes?

The IRS hasn't decided. Some practitioners treat sports and election contracts as wagers; many treat event contracts as capital assets. Courts are split on whether sports contracts are gambling under state law, but those cases concern regulation, not federal income tax.

Is gambling or capital gains treatment better?

It depends on your results. Capital treatment taxes only net gains and lets losses carry forward, which favors most traders, especially losers and high-volume break-even traders. Gambling treatment is rarely cheaper after 2025, but it is sometimes chosen as a conservative characterization for wager-like contracts. That's a decision for you and a professional.

Can I treat some contracts as gambling and others as capital?

Some practitioners argue contracts should be classified by their nature, for example sports versus economic-data contracts. Any split needs a consistent, documented rationale. Discuss it with a professional.

Does the 90% rule apply to capital losses?

No. The 90% limit is in §165(d), which covers wagering losses only. Capital losses follow the normal $3,000-a-year limit and carryforward.

Do I get a W-2G from a prediction market?

Prediction market venues generally don't issue W-2Gs for contract results. The 2026 W-2G threshold for most gambling winnings is $2,000.

Which treatment does OddsFile use?

None by default. OddsFile computes estimates under other income, capital, Section 1256 and gambling with the 90% limit, side by side, and recommends none of them.