Do Prediction Market Traders Get the 20% QBI Deduction?

Mostly no. The 20% qualified business income deduction needs a trade or business, and capital gains are excluded from it whether or not you have one. So capital, Section 1256 and hobby-level other-income reporting all produce no QBI. The open cases are a trader with a Section 475 election and a professional gambler on Schedule C. Both could have ordinary business income, but the IRS has said nothing on prediction markets, and neither result is settled.

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.

The four gates

Section 199A only helps if you pass all of these.

1. A trade or business. The regulations mean a §162 trade or business, which needs continuous, regular activity with a profit motive. Occasional trading isn't one.
2. Qualified items. Short-term and long-term capital gains and losses are excluded by §199A(c)(3)(B).
3. Not a disqualified specified service business, at least above the income thresholds.
4. The caps, including 20% of taxable income less net capital gain.

Gate 2 stops most traders. It applies even if you truly are in business, so trader tax status alone doesn't help. Business expenses on Schedule C with capital gains on Schedule D produce no QBI from the gains.

Result by treatment

The Section 475 route

A valid §475(f) election makes gains and losses ordinary, which clears gate 2. Gate 3 is the problem. §199A(d)(2) names "trading" in securities, partnership interests or commodities as a specified service. Treas. Reg. §1.199A-5(b)(2)(xii) defines this as a trade or business of trading in securities or commodities as defined in §475, and it applies even when you trade for your own account.

That creates a neat trap. To use §475(f), your contracts must be securities or commodities under §475. If they are, you're likely in a specified service business. The rule isn't fatal, though, because the disqualification only applies at higher income.

These are from Rev. Proc. 2025-32. So a §475 trader below the threshold could in principle claim it. But whether event contracts qualify for §475 at all is doubtful, and without a valid election you're back at gate 2.

The professional gambler route

A full-time gambler can be in a trade or business under Commissioner v. Groetzinger, and that income is ordinary. The list of specified services in §1.199A-5 doesn't mention gambling or wagering. The catch-all for a business whose principal asset is "reputation or skill" is limited by the regulation to endorsements, licensing a name or likeness, and appearance fees, so it shouldn't reach ordinary gambling.

Read together, that points toward net Schedule C gambling income being QBI. Treat that as a reading, not a rule: we found no regulation, ruling or case applying §199A to a gambler, and none on event contracts. Two more issues follow.

• You must actually be a gambler for tax. Claiming wagering treatment for QBI means accepting the 90% loss limit and self-employment tax.
• A trading reading could disqualify it. If the IRS said event contracts are commodities and your activity is trading, the specified service rule would apply again.

Worked example

Rita is single in 2026, a professional gambler on Schedule C with $60,000 of net profit after the 90% rule, and has no other income. These assume the position holds.

The Form 8995 instructions list the deductible part of self-employment tax among the items that reduce QBI. The second limit applied here, not the first, because the standard deduction shrinks taxable income. In the 12% bracket, the deduction saves about $950 of income tax. That is useful but far less than 20% of her profit suggests, and it doesn't reduce her self-employment tax.

Above the thresholds, a wage limit applies

Above the threshold, for a business that isn't a specified service, the deduction is generally limited by §199A(b)(2) to the greater of 50% of W-2 wages, or 25% of wages plus 2.5% of qualified property. A solo gambler with no employees and no equipment has neither. So high earners on this route lose the deduction anyway, once past the phase-in.

The 2026 minimum

From 2026, §199A(i) sets a $400 minimum deduction for someone with at least $1,000 of QBI from active businesses in which they materially participate. It only helps if you have QBI. It doesn't change any of the gates.

Does an LLC or S corporation change this?

No. An entity doesn't change the character of capital gains or the specified service rules. See prediction market LLCs.

What to do

1. See which treatment you'd use before thinking about QBI.
2. If capital or Section 1256, stop: no QBI.
3. If Schedule C or §475, ask a preparer to analyze the gates and consider Form 8275. When a QBI deduction is claimed, the substantial understatement threshold is lower: the greater of 5% of the correct tax or $5,000.

Run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. Those figures show the income before any QBI question arises.

FAQ

Can I take QBI on Kalshi rewards or interest?

Interest generally isn't QBI unless properly allocable to a business, and interest on working capital is excluded. Rewards depend on whether you're running a business, which is unsettled.

Does QBI reduce self-employment tax?

No. It's a deduction from taxable income only.

Which form claims it?

Form 8995, or Form 8995-A in more complex cases.

Do I need to itemize?

No. It is claimed whether you itemize or take the standard deduction.