IRS Leaves Prediction Market Traders in Tax Lurch as Millions Face Filing Uncertainty

**TL;DR:** The IRS has not issued guidance on how to tax prediction market profits, leaving millions of traders to navigate tax season without clear rules as platforms like Kalshi process billions in volume.

Prediction markets have existed for decades, but platforms like Kalshi and Polymarket have seen explosive growth since 2023. Around 3 percent of Americans—millions of people—now use these platforms to trade event outcomes ranging from election results to economic indicators. The question of how to report those gains has moved from a niche concern to an urgent issue for many taxpayers.

Kalshi, which serves a predominantly American user base, processed over $12 billion in monthly trade volume in March, according to Defi Rate. That figure dwarfs the activity seen on legacy prediction platforms and underscores how Main Street has embraced these markets. Despite that scale, the IRS has not issued official guidance on how traders should approach taxation of prediction market profits.

Tax experts describe the situation as a vacuum. "It puts the taxpayer in a bad position," says Patrick Camuso, an accountant specializing in digital assets. "You have a vacuum of guidance."

Without explicit rules, traders are taking varied approaches. Some are applying statutes governing financial derivatives like futures contracts and foreign currency contracts. Others are treating gains as gambling winnings. Many are simply reporting profits as regular income and hoping for the best. Camuso describes prediction markets as "a mix of wagering, derivatives, and investment contracts all mixed together in a unique bucket," adding that his firm takes a conservative position for most clients due to the regulatory ambiguity.

This patchwork approach carries risks. The IRS could challenge reporting positions years later, potentially imposing penalties and interest. Conversely, over-reporting means paying more than necessary.

**What It Means:** Traders face real compliance risk with no clear path forward. The IRS will eventually need to provide guidance—the question is whether it comes before millions of amended returns become necessary.