Prediction Market Taxes: Crypto Contracts and Records

A prediction-market position can produce more than one record: funding a wallet, acquiring an outcome token, selling before resolution, receiving a settlement payout and paying network or trading fees. For an onchain platform, the collateral itself may be a digital asset with its own cost basis. This guide separates those layers and shows how to build a defensible transaction file before using CoinLedger or preparing a U.S. tax return.

Last reviewed: September 16, 2026. This article provides general educational information focused on U.S. federal tax recordkeeping. It is not legal, accounting or tax advice. The IRS has not issued a single definitive classification covering every prediction-market contract, and treatment can depend on the platform, contract and taxpayer. Consult a qualified tax professional before filing.

What is a prediction market?

A prediction market lets participants take positions on whether a defined event will occur. A contract may resolve according to an election result, economic release, sports outcome, cryptocurrency price threshold or another verifiable event. Prices often move between zero and one dollar and can be interpreted as the market’s implied probability, but the exact trading and settlement mechanics depend on the venue.

Kalshi operates as a U.S. Commodity Futures Trading Commission designated contract market. CFTC filings describe Kalshi products as event contracts and identify binary-option products certified for trading. Polymarket uses blockchain infrastructure on Polygon, smart wallets, collateral and outcome positions. Regulatory status and technical design are therefore not interchangeable, even when two contracts ask a similar question.

Why prediction-market tax treatment is unsettled

CoinLedger reports that the IRS has not published a formal ruling that places every prediction-market contract into one universal tax category. Tax professionals may consider several approaches, including wagering income, capital gain or loss, and—in narrower circumstances involving particular regulated contracts—possible Section 1256 treatment.

These approaches can produce different forms, timing and loss limitations. CFTC regulation alone does not prove Section 1256 treatment, while the “prediction market” label alone does not establish capital-asset or wagering treatment.

Three separate layers to record

Combining all three into one result can hide collateral gains or losses and cause transfers, wraps and redemptions to be counted incorrectly.

Kalshi and Polymarket are not the same recordkeeping problem

Polymarket collateral: verify the current token flow

Current Polymarket documentation describes pUSD as the collateral token used for trading. It is an ERC-20 token on Polygon backed by USDC, with wrapping and unwrapping handled by collateral contracts. Older account histories and third-party explanations may refer directly to USDC or USDC.e. Record the actual assets and contracts used during the relevant tax year rather than assuming every historical workflow is identical.

The IRS includes stablecoins within its definition of digital assets. If a stablecoin is held as a capital asset, a disposition can create a capital gain or loss even when the token is designed to remain near one dollar. That result may be small, but a small result is not the same as no record.

Wrapping USDC.e into pUSD, acquiring outcome positions and later unwrapping collateral can require transaction-level review. Do not force every contract interaction into a taxable sale merely because tokens moved. At the same time, do not delete the collateral records solely because the dollar value remained close to one. Preserve them and apply a documented classification consistently.

Opening a prediction-market position

When a user acquires a YES or NO position, record enough information to reproduce the economics without relying on a screenshot:

• Platform and account or wallet used.
• Complete market question and market identifier.
• YES or NO side.
• Trade date and time with time zone.
• Number of shares or contracts.
• Price per share and total amount paid.
• Trading, network and funding fees.
• Collateral asset and its fair market value.
• Order ID, transaction hash or other source reference.

Selling before the event resolves

A trader does not always wait for settlement. If a YES position is purchased at $0.35 and sold at $0.62 before resolution, the records should show an acquisition and a disposal. The ultimate event outcome may no longer affect that closed position.

Preserve quantity sold, proceeds, fees and remaining quantity. If capital-asset treatment applies, lot selection and holding period may matter.

Settlement of winning and losing positions

At resolution, a winning binary position may redeem for a fixed value while the losing side becomes worthless or redeems for zero. Record the resolution source, settlement timestamp, quantity, gross payout and any fees. Do not record the payout as pure profit without subtracting or otherwise accounting for the amount paid for the position under the chosen tax treatment.

Example: 100 YES shares acquired for $0.40 each cost $40 before fees. A $100 settlement payout represents $60 of economic profit before fees, not $100. This arithmetic example does not decide whether the $60 belongs on Form 8949, Schedule 1, Form 6781 or another location.

Possible U.S. reporting approaches

If wagering treatment applies, IRS Publication 505 states that beginning in 2026 the gambling-loss deduction is limited to the lesser of 90% of gambling losses or gambling winnings. Deduction mechanics and itemization requirements can create taxable income even when economic results appear close to break-even. Do not apply that rule unless the activity has first been classified appropriately.

Why Section 1256 should not be assumed

Kalshi is a CFTC-designated contract market, but venue status is only the beginning of the analysis. Section 1256 defines covered contract types and has specialized mark-to-market and 60/40 rules. CoinLedger describes applying Section 1256 to event contracts as an aggressive position and notes disagreement among tax professionals.

Ask a qualified professional to evaluate the specific contract and preserve the product terms and regulatory or platform identifier that existed when the trade occurred.

Stablecoin dispositions can be a second tax layer

An onchain prediction trade can involve both the event position and a digital-asset collateral transaction. IRS digital-asset FAQs state that digital assets are property and specifically include stablecoins. If stablecoins held as capital assets are disposed of, gain or loss is recognized even when a broker does not issue Form 1099-DA.

Suppose USDC was acquired for $500 and later $500 of USDC is used while its tax basis is $499.50. The collateral disposition may create a $0.50 gain before applicable transaction-cost rules, separately from the result of the event position. Real records can be more complex when assets are bridged, wrapped or acquired in many lots.

Do not report the same economic value twice. A wallet import might identify outgoing collateral while a manual entry separately records acquisition of the prediction position. Reconciliation must connect those entries rather than treating both as unrelated expenses.

Fees, gas and transaction costs

Polymarket’s current fee documentation says fee availability and rates depend on market category and order role, and that some markets are fee-free. Intermediaries may charge deposit or withdrawal costs even when the platform itself does not. Record what was actually charged instead of applying one assumed rate to every market.

Tax treatment can depend on whether a cost relates to acquiring or disposing of collateral, acquiring or disposing of the contract, or moving assets between wallets. Keep network fees separate from trading fees until they are classified. Also record which asset paid each fee because spending a digital asset can have its own basis and fair-market-value consequences.

Transfers are not automatically income

Funding a platform from a wallet you own and withdrawing back to another wallet you own may include self-transfers. Those movements should be matched across imported accounts so they are not mislabeled as income, gifts or sales solely because one side is missing.

Import every relevant source: the exchange where collateral was acquired, intermediate wallets, bridge activity if used, the Polygon wallet and the destination of withdrawn funds. Missing one account can break the chain and create unexplained deposits or zero-basis warnings.

Platform record, blockchain record and tax record

Importing records into CoinLedger

1. List every wallet, exchange and platform involved in acquiring and moving collateral.
2. Import supported blockchain addresses, including relevant Polygon activity.
3. Import the exchange history that establishes the stablecoin’s original cost basis.
4. Use the platform export to identify fills, contract names and settlements.
5. Review transfers, wraps, outcome-token operations and redemptions individually.
6. Use CoinLedger’s manual import workflow when a required transaction is not supported automatically.
7. Resolve duplicates, missing basis and unmatched transfers before generating forms.
8. Document manual edits and the tax professional’s classification decision.

A successful import does not prove every smart-contract interaction received the correct label. Compare totals with platform statements and wallet balances.

Avoid double-counting Polymarket activity

Onchain protocols can produce several token events for one user action. A collateral wrap, conditional-token split, trade and later merge or redemption may appear as separate movements. Counting every incoming token as income and every outgoing token as a sale can inflate volume and create fictional gains.

• Group records by transaction hash and user action.
• Identify internal protocol tokens rather than assigning arbitrary market values.
• Match collateral outflow to the acquired position.
• Match settlement or sale proceeds to the closed position.
• Keep gas and platform fees visible.
• Confirm that deposits and withdrawals are not also categorized as income.

Worked recordkeeping example

Assume a user acquires 1,000 USDC on an exchange, transfers it to a Polygon wallet, converts the required collateral and buys 200 YES shares for $0.45 each. Later, 120 shares are sold for $0.70 and 80 are held through a winning $1 settlement.

The file should contain the original USDC acquisition and basis; the exchange withdrawal and wallet deposit; any bridge or wrap; each position fill; the 120-share sale; the 80-share settlement; and every fee. The economic contract result before fees is $30 on the early sale plus $44 on the settled portion. Stablecoin and fee-asset gains or losses require their own calculations.

This example deliberately stops before selecting tax forms. The purpose is to show that complete records support multiple defensible analyses, while one net payout number does not.

Quarterly reconciliation workflow

1. Download account and trade exports before platform formats change.
2. Save market descriptions and resolution sources for closed positions.
3. Import new wallet and exchange transactions.
4. Compare cash and token balances with CoinLedger.
5. Investigate unmatched transfers and missing basis.
6. Separate open positions from realized sales and settlements.
7. Record the treatment selected with the tax adviser.
8. Keep source files and a read-only reconciliation copy.

Common mistakes

• Reporting the entire settlement payout as profit.
• Ignoring USDC or pUSD collateral records because the value was near one dollar.
• Assuming every prediction contract has the same tax classification.
• Claiming Section 1256 solely because the venue is CFTC regulated.
• Counting a wallet deposit as income and its later use as another expense.
• Importing Polygon but omitting the exchange where collateral was purchased.
• Deleting protocol token movements without documenting the reconciliation.
• Failing to record positions sold before the event resolved.
• Relying on a missing tax form as a reason not to report activity.
• Applying one current platform workflow to older transaction history.

Frequently asked questions

Are all prediction-market winnings gambling income?

There is no universal IRS ruling classifying every prediction-market contract the same way. Platform, contract and taxpayer facts matter. Ask a qualified professional rather than choosing a label based only on the market topic.

Are Polymarket trades taxable if no tax form arrives?

The absence of a form does not remove reporting obligations. Preserve wallet and platform records. Digital-asset dispositions can require reporting even without Form 1099-DA.

Does spending USDC create a taxable event?

IRS guidance includes stablecoins as digital assets. Disposing of a stablecoin held as a capital asset can create gain or loss, even if the result is small.

Can I report Kalshi contracts under Section 1256?

Do not assume eligibility. CoinLedger characterizes this as an aggressive position for event contracts. Obtain advice based on the specific product and current law.

Can CoinLedger import every prediction-market action automatically?

CoinLedger can import supported wallets and allows manual transactions, but smart-contract records still require review. Verify current integration support and reconcile results with platform exports.

What records should I keep for an unresolved market?

Keep fills, quantity, cost, fees, market identifier, wallet evidence and year-end status. Open-position treatment depends on the applicable classification.

Final checklist

• Every platform, exchange and wallet has been identified.
• Collateral basis is connected to the original acquisition.
• Each position records side, quantity, dates, price and fees.
• Early sales are separated from final settlements.
• Transfers are matched across owned accounts.
• Stablecoin dispositions and fee assets are reviewed.
• Protocol operations are reconciled without double counting.
• The chosen tax classification is documented by a qualified professional.
• Source exports, hashes and workpapers are retained.

Official references

• IRS — Frequently asked questions on digital asset transactions
• IRS Publication 505 — 2026 gambling-loss limitation
• CFTC — Kalshi designated contract market filing
• Polymarket documentation — Platform and wallet architecture
• Polymarket documentation — pUSD collateral
• CoinLedger — Prediction Markets Tax