Kalshi Taxes in California, Texas and Other States: Prediction Market State Taxes

State taxes on Kalshi and other prediction markets depend on where you live, not where the exchange is. Texas, Florida and the other states without a personal income tax don't tax your gains. California taxes them at its regular income rates no matter which federal treatment you use, because it has no lower rate for capital gains. And states don't automatically follow federal changes, so the new federal 90% gambling-loss limit may not apply on your state return.

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

Three questions that decide your state tax

1. Does your state have a personal income tax? If not, prediction market gains aren't taxed by the state.
2. Does your state tax capital gains at a lower rate? Most don't. If not, the federal fight over 60/40 or capital treatment matters less at the state level.
3. Does your state follow federal gambling-loss rules? Some allow losses up to winnings, some limit them, and some allow none. Whether a state picks up the 2026 federal 90% limit depends on how it conforms to the Internal Revenue Code.

States without a personal income tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming don't tax wages or ordinary investment income. "Kalshi taxes Texas" is therefore a federal question only. Two cautions:

• Washington has a separate capital gains excise tax on certain long-term capital gains above a large annual threshold. Prediction market positions are rarely held over a year, but if you claim Section 1256 treatment, 60% is labeled long-term. Ask a Washington preparer whether that matters for you.
• Residency. If you moved during the year, the old state may tax gains realized while you lived there.

California

California is the most searched state for this question, and the most consequential.

Rates. California taxes capital gains as ordinary income, with rates up to 12.3%, plus a 1% surcharge on income over $1 million (13.3% in total). There is no preferential capital gains rate, so the federal choice between capital, Section 1256, other income or gambling mostly changes how losses are handled, not the rate on gains.

Conformity. California conforms to the Internal Revenue Code as of a fixed date (January 1, 2015, under Revenue and Taxation Code §17024.5) and adopts later federal changes only by passing its own legislation. We found no California law or FTB guidance that expressly adopts the federal 90% wagering-loss limit as of October 2026, but sources disagree: the California Taxpayers Association has described the 90% cap as applying on state returns too, without citing state law. Treat this as unsettled. If California does not conform, a Californian using gambling treatment could deduct 100% of losses up to winnings on the state return while being limited to 90% federally. Confirm in the FTB's 2026 Schedule CA instructions (the 2025 version is linked; the 2026 version publishes early 2027) before relying on it.

Losses under capital treatment. California follows the federal $3,000 capital loss limit and carryforward, so a net capital loss works similarly on both returns.

Worked example: a California trader in 2026

Kalshi results for the year: $40,000 of winning contracts, $36,000 of losing contracts, net +$4,000. You itemize. Assume a 9.3% California marginal rate.

On the federal side, gambling treatment taxes $7,600 for a $4,000 profit (see the 2026 90% limit). On the California side, under these assumptions, it doesn't. If California later conforms, its column would match the federal one and the California tax would be $707.

States that restrict gambling losses

If you or your preparer use gambling treatment, the state rules can be harsher than the federal 90%:

• No deduction at all. Illinois has no itemized deductions, so gambling losses generally aren't deductible against Illinois income. Several other states have historically limited or disallowed them; lists vary by source and change over time.
• Itemizing required. In states that start from federal itemized deductions, you may need to itemize on the state return to deduct losses, even if you don't federally.
• Only some operators. At least one state has limited deductions to losses at state-licensed operators.

This is one more reason the choice between gambling and capital treatment deserves a preparer's review: a treatment that's tolerable federally can be expensive at the state level.

How states see Polymarket and Hyperliquid

States generally start from federal adjusted gross income, so whatever you report federally on Form 8949 or Schedule 1 flows into the state return. Polymarket's international exchange is close-only for US users per its geoblock documentation, and Hyperliquid issues no forms; neither sends anything to your state. State tax is computed from the same records you use federally. The Polymarket taxes guide and Hyperliquid taxes guide cover those records.

What to check for your state

1. Does it tax personal income, and at what rate on capital gains?
2. Its conformity date to the Internal Revenue Code, and whether it adopted the 2026 change to §165(d).
3. Whether gambling losses are deductible, and whether you must itemize on the state return.
4. Whether it follows the federal capital loss limit and carryforward.
5. Residency dates if you moved.

Your state revenue department's current-year instructions are the authority. The federal side is covered in are prediction market winnings taxable? and Kalshi taxes and the 1099.

Run the free OddsFile check to see your winnings, losses and net per treatment, the numbers any state return starts from.

FAQ

Do I pay state tax on Kalshi winnings in Texas?

No. Texas has no personal income tax. Federal tax still applies.

Does California follow the federal 90% gambling-loss limit?

Unclear. We found no California law adopting it as of October 2026, and California conforms to the federal code as of a fixed date, but at least one California tax group describes the cap as applying to state returns. Confirm with the FTB's 2026 instructions or a California preparer.

Does California tax capital gains at a lower rate?

No. California taxes capital gains as ordinary income, so the 60/40 split has no state rate benefit.

Which states don't allow gambling losses?

Illinois is the most cited example. Other states have restricted or disallowed them at various times; check your state's current forms.

Is Kalshi legal in my state, and does that change the tax?

Legality is being litigated state by state, but income is taxable regardless. Court rulings on sports contracts don't decide federal or state income tax treatment.