Tax experts in the U.S. are unsure how to report earnings from prediction markets, as the IRS remains silent on guidelines.
Experts in the U.S. are grappling with how to appropriately report taxes on earnings generated from prediction platforms such as Polymarket and Kalshi. The Internal Revenue Service (IRS) has yet to issue definitive guidelines, leaving taxpayers uncertain on how to proceed.
“We have a vacuum of guidance. This puts taxpayers at a disadvantage,” noted Patrick Camuso, an accountant specializing in digital assets.
Taxpayers are utilizing various methods for reporting their gains or losses. Some leverage rules applicable to financial derivatives, while others treat profits as gambling winnings or declare them as ordinary income. Camuso points out that the hybrid nature of these platforms complicates matters, stating, “Our firm typically takes a more conservative stance for most clients due to the ambiguity of many tax rules.”
Declaring earnings as gambling winnings can be particularly tedious, requiring detailed tracking of individual bets rather than a net income figure. Trader Nate Meininger humorously remarked on the ambiguity surrounding tax filing, but he is actively consulting with an accountant and reviewing tax obligations associated with Kalshi's documentation.
“I don’t do it myself. It’s too complicated,” Meininger confessed.
Another approach under consideration is treating prediction market contracts as instruments under Section 1256 of the U.S. Tax Code, which would allow profits and losses to be taxed using a system where 60% is classified as long-term capital gain and 40% as short-term.
Challenges for Users of Offshore Platforms
U.S. citizens accessing platforms like Polymarket via VPNs face additional challenges. These platforms often do not provide tax documentation, and while U.S. users are typically banned from unlicensed services, they are still obligated to declare their income. This means that individuals engaged in trading on these platforms must independently report their earnings.
The tax landscape may become more complex as the IRS undergoes significant restructuring, which some sources suggest could be influenced by operatives from Elon Musk's DOGE. In April, CFTC Chairman Michael Selig emphasized the urgency for establishing clear regulations for prediction markets to avoid a scenario where companies move overseas, placing investors at risk of losing their investments.
