Unsettled tax status puts prediction market profits under scrutiny

Election prediction market traders face an unresolved federal tax question: whether their profits count as gambling income or gains from Section 1256 contracts. The IRS has not settled that classification, according to Shelton Financial Management.

The distinction matters as federal rules beginning in 2026 restrict deductions for gambling losses to 90 percent of losses, with deductions also capped at total winnings.

Tax uncertainty meets growing trading activity

Congressional race trading topped 220 million dollars this cycle, according to Shelton Financial Management. That volume puts the unresolved treatment of election contracts in focus for prediction-market participants.

Shelton Financial Management identifies two possible tax categories—gambling income and Section 1256 contract gains—but does not report a definitive IRS determination on which applies to election prediction market profits.

Platform structures differ

Kalshi operates as a CFTC-regulated exchange, while Polymarket operates under a different structure, according to Shelton Financial Management. Those distinctions form part of the backdrop to the tax question; the supplied account does not establish a tax classification for either platform.

For traders, the uncertainty concerns both how profits are classified and whether the 2026 gambling-loss deduction restriction applies. The reported rules limit deductions if losses fall within the gambling category, but do not themselves resolve the classification of prediction market activity.

What it means for prediction markets

• Classification remains unsettled: Shelton Financial Management says the IRS has not determined whether election prediction market profits are gambling income or Section 1256 contract gains.
• Loss treatment matters: Beginning in 2026, gambling-loss deductions are limited to 90 percent of losses and cannot exceed total winnings.
• Platform differences are not a tax ruling: Kalshi’s CFTC-regulated status and Polymarket’s different structure do not, in the supplied reporting, establish how either platform’s traders are taxed.