Prediction Market Taxes in California: 2026 Guide

Prediction-market profits are taxable, federally and in California (1%–13.3%, no lower capital-gains rate). The IRS hasn't issued guidance on how event contracts are classified: gambling income, capital gains and Section 1256 are all argued. Kalshi provides a profit-and-loss statement for your trades rather than a trading 1099. Keep full records and ask a tax professional.

Yes, prediction-market profits are taxable, both federally and in California. What isn't settled is how the IRS classifies them: as of September 2026 there is no IRS guidance on event contracts. This guide explains the competing treatments, what Kalshi (opens in a new tab) and Polymarket (opens in a new tab) US actually send you, how California taxes the profits, and what records to keep.

This is general information, not tax advice. The right treatment depends on your situation, and the rules may change once the IRS acts. If your trading is more than occasional, talk to a tax professional who has handled event contracts.

Are prediction market winnings taxable?

Yes. All income is taxable unless the law exempts it (Internal Revenue Code §61), and there's no small-amount exception. You owe tax on your net profit whether or not a platform sends you a form.

How does California tax them?

California taxes most income, including trading profits and gambling winnings, at its regular rates of 1% to 12.3%, plus a 1% surcharge on income over $1 million (13.3% top rate). California has no lower rate for capital gains, so your profit is taxed at your normal state bracket whichever federal treatment applies.

The California Franchise Tax Board (opens in a new tab) puts it plainly: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." (checked October 14, 2026)

How are Kalshi and Polymarket profits taxed federally?

There is no IRS notice, ruling or form instruction on event contracts traded on CFTC (opens in a new tab)-regulated exchanges. Tax professionals argue for three different treatments:

• Gambling income: profits reported as other income; losses deductible only as an itemized deduction, up to your winnings.
• Ordinary income or capital gains on a derivative, depending on the facts.
• Section 1256 contracts: 60% long-term / 40% short-term capital gains, marked to market at year-end and reported on Form 6781. This is the most aggressive position.

None of these has been confirmed by the IRS. KPMG's 2026 analysis doubts that fully collateralized event contracts meet the Section 1256 definitions, so don't assume the 60/40 split applies.

What about losses?

It depends on the classification. Under gambling treatment, losses count only as an itemized deduction up to your winnings, and from tax year 2026 only 90% of gambling losses are deductible, so even a break-even trader can owe tax. Capital-loss rules are different: capital losses offset capital gains plus up to $3,000 of other income a year, with the rest carried forward.

What forms will I get?

• Kalshi (per its help center article "What Tax Documentation Does Kalshi Provide?", checked October 14, 2026): if you hit IRS reporting thresholds, Kalshi issues 1099-B (proceeds from broker transactions, meaning crypto transfers), 1099-INT (interest paid by Kalshi), 1099-MISC (credits and rewards from Kalshi) and 1099-DA (digital-asset transactions, reported via ZeroHash). For your event-contract trades it provides a Profit and Loss (PnL) statement covering profits, losses and fees, worked out first-in, first-out (FIFO); that is not a 1099 showing your trading profit.
• Polymarket US: it hasn't clearly published which tax forms the app issues. Keep the app's trade history either way.
• Any 1099 you do receive also goes to the IRS, and California expects the matching amounts on your Form 540.

No form doesn't mean no tax. Report your profit either way.

What records should I keep?

1. Each platform's year-end profit-and-loss statement or trade export.
2. The date you bought each contract and the date it settled or was sold.
3. What you paid and what you received per contract, including fees.
4. Your deposits and withdrawals.
5. Any 1099s you receive.

Common mistakes California traders make

1. Treating one tax treatment as settled. Whether someone tells you "it's gambling" or "it's 60/40", neither has been confirmed by the IRS.
2. Forgetting estimated payments. Meaningful profits can mean quarterly estimated tax to both the IRS and the California Franchise Tax Board.
3. Not keeping Polymarket US records because no form arrived.

For the broader legal picture in California, see our legality guide. For costs, see Kalshi vs Polymarket. To get started, see how to open your first prediction market account.

Final reminder: this is not tax advice. Talk to a licensed tax professional before you file.

Sources

• Kalshi Help Center: "What Tax Documentation Does Kalshi Provide?" (help.kalshi.com, checked October 14, 2026)
• KPMG: Taxation of sports event contracts (2026) (opens in a new tab)
• IRS: Gambling income and losses (Topic 419) (opens in a new tab)
• California Franchise Tax Board: Capital gains and losses (opens in a new tab) (checked October 14, 2026)

About the author

Catie Di Stefano

Catie Di Stefano has spent 15 years in the regulated gambling industry, starting at Betsson Group in Malta and spending nearly five years at Gaming Innovation Group (GiG) before building an independent consultancy across European and US iGaming brands, including a licensed engagement with Hard Rock Hotel & Casino Atlantic City under a New Jersey DGE vendor license. She's been interviewed by the California Business Journal on the rise of online gambling in the US, and spoke on a 2022 Next.io panel specifically about California's gaming market. She went on to build the OnlineGamblers.com brand and hold marketing director roles at Smartico.ai and Vegas Kings, and has been named to multiple iGamingExpress industry rankings. She now covers regulated prediction markets full-time.

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Are prediction market winnings taxable in California?

Yes. Net profits are taxable federally and in California, with no small-amount exception, whether or not a platform sends you a form.

Does Kalshi send a 1099?

When you hit IRS reporting thresholds, Kalshi issues a 1099-B (crypto transfers), 1099-INT (interest), 1099-MISC (credits and rewards) and 1099-DA (digital assets, via ZeroHash). For your trades it provides a downloadable profit-and-loss statement rather than a 1099 showing your trading profit.

Does Polymarket US send a 1099?

Polymarket hasn't clearly published which tax forms its US app issues. Keep the app's trade history and report your profit either way.

Does Section 1256 (60/40) treatment apply?

It's disputed. Some tax professionals take that position, but the IRS hasn't issued guidance, and KPMG's 2026 analysis doubts event contracts meet the Section 1256 definitions.

Are prediction-market profits gambling income?

Nobody knows for certain yet. Some tax professionals treat them as gambling income, others as capital gains, and some argue Section 1256 applies. California taxes all of these at your regular state rate.

Can I deduct prediction-market losses?

It depends on the classification. Under gambling treatment, losses count only as an itemized deduction up to your winnings, and only 90% of gambling losses from 2026. Capital losses follow different rules.

How much California tax will I pay?

California taxes these profits at its regular income-tax rates, 1% to 13.3% depending on your bracket, on top of federal tax.

Is this tax advice?

No. This is general information only. Talk to a licensed tax professional familiar with event contracts before you file.