Can You Deduct Prediction Market Expenses? Data, Bots, VPS and Tax Software

Most prediction market traders can't deduct expenses such as data feeds, bots, VPS hosting or tax software. Those are investment expenses, and federal law no longer allows them for individuals. The exceptions are real trading businesses and professional gamblers. Trading fees are different: they aren't deductions at all, but they do reduce your gain, so everyone gets the benefit of those.

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.

Fees are not expenses

Separate these first, because the rules are different.

The IRS says basis includes fees, commissions and other acquisition costs for virtual currency, and Topic 429 says that for traders, commissions and costs of acquiring or disposing of positions aren't deductible but must be used to figure gain or loss. Under capital treatment you get full value from fees through a smaller gain. See Polymarket fees and taxes.

Why ordinary traders get nothing

Investment expenses used to be miscellaneous itemized deductions. Congress suspended those for 2018 through 2025, then made the change open-ended. The current statute says no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and the 2025 law removed the end date. It now sits at Section 67(h).

The Publication 529 language is direct: investment fees, custodial fees and other expenses for managing investments that produce taxable income "are miscellaneous itemized deductions and are no longer deductible." It says the same about legal and tax expenses, which is why a personal tax software bill generally isn't deductible for an individual investor.

What each status allows

Traders

If you meet the trader tax status test, Publication 550 says expenses an investor would have taken on Schedule A go on Schedule C if they're from the trading business. That doesn't depend on a mark-to-market election. Note the catch: whether event contracts qualify as trading in securities or commodities is itself unsettled.

Gamblers

Under Section 165(d), "losses from wagering transactions" includes any deduction otherwise allowable under the income tax chapter that's incurred in carrying on the wagering transaction. So a professional gambler's expenses are pooled with losses, cut to 90% from 2026 and capped at winnings. They can't create a net loss.

For casual gamblers it's murkier. The 2025 Publication 529 describes gambling losses as actual wagers plus expenses incurred in connection with the gambling activity, such as travel to and from a casino. But the statute says "otherwise allowable," and a casual gambler's expenses may not be otherwise allowable to begin with. Publication 529 reflects the IRS's reading for 2025. For a data subscription, don't assume you can count it without asking a preparer.

Worked example

A trader spends $3,000 in 2026 on data, a VPS and bot tools, in the 24% bracket.

A trader or gambler on Schedule C might see a different net once other limits and tax are taken into account. Expenses over the winnings cap have no effect at all for gamblers.

Hobby activity

If you aren't in it for profit, income still counts. The 2026 draft Schedule 1 has a line 8j for activity not engaged in for profit income, and the expenses generally aren't deductible for the same Section 67 reason. For most occasional traders this distinction changes nothing, since no expenses are deductible anyway.

Crypto wallets and hardware

A hardware wallet for a personal portfolio is a personal or investment cost, so no deduction. For a trader or business, business use may qualify. Keep receipts.

Interest on money you borrowed

Investment interest has its own rules, and this article doesn't try to cover them. Publication 550 notes that traders generally handle interest differently from investors. If you've borrowed to trade, ask a preparer.

What you can do instead

• Keep fees inside your basis. Don't report them twice, but don't lose them either. Software that ignores fees overstates your profit.
• Ask whether you actually run a business. If you do, keep books from day one.
• Track expenses anyway. If your status changes, or the law does, you'll have the record.
• Time your purchases. A business expense is deductible in the year paid, for a cash-method filer.

Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. Its fee handling is the part of your costs that counts for everyone.

FAQ

Can I deduct OddsFile or other tax software?

For an individual investor, no. For a real trading business or a gambler on Schedule C, the business portion may be deductible; for gamblers, it falls under the Section 165(d) cap.

Are Polymarket fees deductible?

They reduce your gain or increase your loss instead of being a separate deduction. See Polymarket fees and taxes.

Is this temporary?

The 2025 law removed the expiration date from the suspension, so it no longer has a stated end date.

Do I need an LLC to deduct expenses?

No. The test is whether you have a business. See should you trade through an LLC?