Prediction market contracts are showing up on client returns

Tax professionals are starting to see something new on client statements: gains and losses from trading prediction market or event contracts on platforms and apps like Kalshi, Robinhood and Polymarket. Trading volume and retail participation increased sharply in 2025 and 2026; many don't realize they've created a tax situation that doesn't yet have a clean answer.

What are prediction market contracts?

Prediction market contracts, also called event contracts, are binary financial instruments. A trader buys a "yes" or "no" position on a defined outcome: Will the Federal Reserve cut rates? Will a specific team win a championship? Will inflation hit a certain number? The contract settles at $1 if the trader is correct, or $0 if wrong.

Platforms like Kalshi operate as CFTC-regulated Designated Contract Markets (DCMs), which distinguishes them from traditional sportsbooks operating under state gambling laws. Robinhood routes its prediction market trades through Kalshi's exchange infrastructure. The industry grew rapidly in 2025. Robinhood's CEO reported more than 12 billion prediction market contracts traded through the platform in 2025 alone. Kalshi Data reported $23.8 billion in total 2025 trading volume for Kalshi, an increase of more than 1,100% year over year.

Are these considered §1256 contracts?

This is the central question in the tax community right now, and the answer is: We don't know yet. 

Some tax professionals argue that because Kalshi is a CFTC-regulated DCM, its contracts may qualify for treatment under §1256. Section 1256 contracts receive a favorable 60/40 tax treatment: 60% of net gains or losses are treated as long-term capital gain or loss, and 40% are treated as short-term, regardless of holding period. Open positions are also marked to market at year-end. For a high-income trader, the tax difference between §1256 and ordinary income treatment can be significant.

However, claiming §1256 treatment for prediction market contracts is considered an aggressive tax position. Here's why: The IRS has not issued any revenue ruling, notice, private letter ruling or formal guidance directly addressing whether prediction market event contracts qualify under §1256. The statute explicitly defines covered instruments, including regulated futures contracts and nonequity options, and these binary, event-based contracts don't clearly fit within those categories. To make matters more complicated, the Dodd-Frank Act added a swap exclusion under §1256(b)(2)(B), and some CFTC materials involving event contracts discuss binary options and swap-related reporting rules, which could raise questions about whether that exclusion applies. Section 1256 covers a specifically defined set of instruments.

The bottom line is that CFTC regulation is relevant to the analysis but doesn't automatically resolve tax character. Any practitioner advising a client to claim §1256 treatment should document the position carefully and consider filing Form 8275, Disclosure Statement.

Three possible reporting approaches

In the absence of IRS guidance, practitioners have identified three frameworks for reporting prediction market contract activity:

1. Capital gain or loss: This is a commonly discussed approach among practitioners, particularly for regulated platforms like Kalshi. Under this approach, gain or loss is analyzed under §1001 and §1221. Gains and losses are reported on Schedule D (Form 1040) via Form 8949, Sales and Other Dispositions of Capital Assets, with character determined by holding period. Wash sale rules may apply if the contracts are treated as stock or securities within §1091.
2. Ordinary income: A conservative approach, treating net gains as ordinary income reported on Schedule 1 (Form 1040), Line 8z. This approach avoids claiming capital or §1256 treatment, but it still requires a supportable reporting position and documentation.
3. §1256 treatment: A very favorable treatment, but also an aggressive one. If this position is taken, gains and losses are reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, which flow to Schedule D (Form 1040). Form 8275 should still be filed to disclose the position.

The 1099 problem

Clients are likely confused about what paperwork they'll receive from these platforms. Robinhood has stated it won't issue 1099s for event contract trades, providing instead an Event Contracts Annual Statement that it explicitly labels as "not a substitute tax reporting form." Kalshi may issue Forms 1099-INT for cash balance interest and Forms 1099-MISC for referral credits or rewards, but the platform doesn't provide a complete transaction-level tax statement for event contract trades.

No 1099 doesn't mean no tax. Under §61, all income is taxable unless specifically excluded. Clients must self-report gains regardless of whether they receive any tax documents.

A new risk for gambling classification

Some practitioners have considered treating these contracts as gambling income. This approach has become significantly more problematic for 2026 activity. The One Big Beautiful Bill Act amended §165(d) to effectively cap usable gambling loss deductions at 90% of gambling winnings for tax years beginning after Dec. 31, 2025. A break-even trader under gambling treatment could end up with phantom income. Capital gains or ordinary income treatment avoids that cap entirely.

What clients need to do now

Clients who traded prediction market contracts in 2026 on any platform should preserve complete transaction records. Don't rely on platform summaries alone. Reconstruction of the full transaction history, including acquisition cost, settlement amount and timing, is required to substantiate any return position.

This is an area where IRS guidance is expected to come eventually. When it does, it could require amended returns. In the meantime, the most defensible approach is to pick a reporting position, apply it consistently, document the reasoning and work with clients to ensure their records are complete. 

As the IRS continues to weigh in on this evolving area, NATP will monitor any new guidance and keep members informed. Check NATP News & Insights regularly for updates as this space develops.