- The I-R-S has not issued direct guidance on how prediction market winnings should be classified for tax purposes.
- Traders must choose between gambling, capital gains, or Section 1256 frameworks for their reporting positions.
- Reporting obligations remain mandatory for tax year 2026 despite the lack of a settled federal classification.
The IRS has not issued direct federal guidance on how prediction markets should be taxed, leaving traders with taxable winnings but no settled classification for the contracts.
The unresolved question is whether those trades count as gambling winnings, capital gains, or Section 1256 contracts. Each category can produce a different result for income rates and loss deductions.
The broad federal rule still applies. Income generally remains taxable unless the law specifically excludes it. Profits from these trades therefore do not become tax-free simply because the agency has not addressed them directly.
Free toolSubstantial Presence Test CalculatorThe uncertainty reaches the tax return. Advisers are using the platform’s facts, the contract’s structure, and the trader’s activity level to select among competing reporting positions.
Three tax frameworks produce three different outcomes
Under a gambling approach, traders report winnings as ordinary income. Losses face limits on their deductibility.
Capital-gains treatment follows a different route. Traders generally report gains and losses from sales on Form 8949 and Schedule D. Short-term gains usually face ordinary income rates, while long-term gains can receive preferential capital-gains rates.
A Section 1256 position would apply a 60/40 formula. Sixty percent of the gain would receive long-term capital-gains treatment, while 40% would face ordinary rates. That split could apply even when the contract had been held briefly.
The classification can change the tax bill. It can also change how losses offset other income.
| Potential classification | Treatment of gains | Treatment of losses or rates |
|---|---|---|
| Gambling | Ordinary income | Deductions subject to gambling-loss limits |
| Capital gains | Short-term gains usually taxed at ordinary rates; long-term gains may receive preferential rates | Reported with investment sales on Form 8949 and Schedule D |
| Section 1256 | 60% long-term capital-gains treatment and 40% ordinary-rate treatment | The 60/40 mix can apply despite a brief holding period |
Advisers are working without a direct federal answer
As of July 18, 2026, the agency has issued no revenue ruling, notice, FAQ, or other direct federal guidance specifically resolving the tax treatment of these contracts.
That gap has pushed the analysis toward individual facts. A trader’s reporting position may depend on the platform used, the contract terms, and whether the activity resembles occasional investing or a regular trading business.
A July 18 report said the agency had not shared details on how winnings and losses should be taxed. The same report described the classification issue as a choice among ordinary-income treatment, capital-gains treatment, and the 60/40 approach.
No single framework has been identified as the federal answer. Practitioners are instead weighing the available positions against the underlying contract and trading activity.
The 2026 return will carry the unresolved issue forward
For tax year 2026, filed in 2027, traders must account for profits even while the classification question remains open. The absence of specific guidance does not remove the reporting obligation.
The most cautious position treats winnings as taxable income. More favorable capital-gains or Section 1256 positions depend on whether the contract facts support them.
The federal government’s eventual guidance could determine whether traders report these transactions as gambling, investment sales, or contracts receiving the 60/40 treatment. Until then, the choice remains tied to the facts of each position.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
