Massachusetts Prediction Market Taxes: Why Gambling Losses May Not Count

Massachusetts is one of the worst states for gambling treatment. It generally allows gambling loss deductions only for losses at licensed casinos, through licensed sportsbooks, or from a gambling trade or business, so a casual Kalshi or Polymarket trader using gambling treatment probably can't deduct losses at all. Under capital treatment you'd net gains and losses instead, with short-term gains taxed at 8.5%. Massachusetts has published nothing on event contracts, so this is a reading of general rules.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed, and we found no Massachusetts guidance either. This article explains the options and the sources behind them; a tax professional can tell you which position fits your situation.

The gambling rule

The Department of Revenue's gambling and lottery tax page and its list of differences from federal law describe a narrower rule than the federal one. Losses that would be itemized on federal Schedule A generally aren't allowed. The exceptions are:

• losses at a gaming establishment licensed under Chapter 23K;
• from tax years beginning on or after January 1, 2024, losses from sports wagers through an operator licensed under Chapter 23N;
• losses from a gambling trade or business.

Allowed losses are limited to the winnings you reported from those sources in the same calendar year. For professional gamblers, the department says Massachusetts follows the 2025 federal change limiting losses to 90%. We read these Massachusetts pages through search extracts, because the site blocks automated reading, so check the wording yourself.

Would a prediction market loss qualify?

Probably not for most people. Kalshi and Polymarket operate under federal CFTC rules, or on-chain, and we're not aware of either being licensed under Chapter 23K or 23N. If you report as gambling, your winnings could be fully taxed, with no loss deduction, unless you're in a gambling trade or business. That's a much harsher result than federal law.

The rates

From the department's tax rates page, as read through extracts:

Older articles cite a 12% short-term rate. That applied to tax years ending on or before December 31, 2022. For tax years beginning on or after January 1, 2023, the short-term rate is 8.5%. The 12% rate now applies to long-term gains on collectibles, with a deduction.

Treatment compared

Say a Massachusetts resident has $20,000 of winning markets and $15,000 of losing markets, a $5,000 net profit, all held under a year.

Gambling costs twice as much as other income, and that's before federal tax. On high volume it gets worse. With $200,000 won and $200,000 lost, a casual gambling position means $10,000 of Massachusetts tax on no profit.

The other-income row looks cheapest, but it assumes Massachusetts would accept that label, which has no direct authority, and that the net figure is allowed. Don't choose a federal treatment for its state effect alone. A short-term gain is taxed at 8.5% by Massachusetts because it is a capital gain, so the capital row is the state's natural result if you're using capital treatment federally.

Losing years

Massachusetts capital loss rules differ from federal in the details. Short-term gains and losses are grouped separately from most income. A net capital loss has limited use against other income in Massachusetts, and carryover rules apply. Your Massachusetts return uses Schedule B for short-term items. Ask your preparer for the exact deduction your year allows, and don't assume the federal $3,000 carries across.

Under gambling treatment, there's no benefit at all from a losing year for a casual gambler.

Interest and rewards

Kalshi interest is generally taxable. Whether a Massachusetts filer's interest falls in the 5% group or elsewhere depends on its source, so follow the form. Rewards and promotional credits are generally income too. See Kalshi interest and rewards.

Professional gamblers

If you truly run a gambling business, Massachusetts allows losses, limited to 90% under the rule the department describes. Trading as a business is a high bar, as explained in filing as a professional gambler. Massachusetts residents have extra reason to look at it, but only if the facts support it. Don't claim it because of the state result.

What to do

1. Decide your federal treatment with the Massachusetts effect in view.
2. If you lean toward gambling treatment, price in losing all state loss deductions.
3. Keep gross and net figures by market.
4. Make Massachusetts estimated payments if needed; the state has its own system.
5. Keep a note of the department pages you relied on, since they change.

For how other states compare, see prediction market state taxes.

Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. Apply the Massachusetts rates above to the net and gross figures for a rough state number.

FAQ

Does Massachusetts treat Kalshi as gambling?

We found no Massachusetts tax guidance saying so. The state's position depends on how the income is characterized.

Can I deduct Kalshi losses in Massachusetts?

Under capital treatment, losses net against gains. Under casual gambling treatment, probably not, because the allowed loss sources are licensed casinos and sportsbooks.

Is the short-term rate still 12%?

No. It has been 8.5% for tax years beginning on or after January 1, 2023.

Does the 90% rule apply in Massachusetts?

The department says it follows the change for professional gamblers. Casual gamblers generally have no general deduction to begin with.