Prediction Market Tax: UK and US Rules for Traders

This is the article no one wants to read and everyone needs to. You have made some money on Polymarket. You have a balance on Kalshi that has grown into something you cannot ignore. The question that has been quietly nagging at you for weeks is finally going to get an answer, or at least the closest thing to an answer that anyone is currently in a position to give you: how is this taxed.

The honest summary is that the rules are not entirely settled, the answer is different in the UK than it is in the US, and there is no substitute for a fifteen minute call with a tax professional who has seen this category before. But here is the lay of the land, in plain English, on both sides of the Atlantic. If you are still getting your head around the underlying products, our explainer on how prediction markets work covers the foundations, and our breakdown of Kalshi event contracts covers the specific instrument the IRS cares about.

This is general information, not personal advice. Treat it as orientation, not as the basis for a tax filing.

The UK position

The starting point for UK tax on betting and gambling is that it is not taxed. HMRC has, since the late 1990s, treated profits from a wager as outside the scope of income tax for individuals. If you back a horse at the bookmaker and it wins, the winnings are yours, gross.

Whether prediction markets fall inside that umbrella is a genuinely open question. There are two positions and it is not yet clear which one HMRC will take. The broader UK regulatory position on these venues helps explain why even the basic categorisation is unsettled.

Position one: it's gambling. Polymarket and Kalshi look, walk and quack a lot like gambling. You stake a sum, you bet on an outcome, you win or you lose based on whether you were right. If HMRC views activity in this category through the same lens it views Betfair, the answer is clean, no tax on profits, no relief on losses, full stop. This is the position that retail users have generally assumed and most accountants will, in the absence of guidance, default to.

Position two: it's a financial activity. Kalshi explicitly markets its product as financial derivatives, not as gambling. If HMRC accepts that framing, particularly for a UK user trading what is, in another jurisdiction, a regulated derivatives contract, profits could fall inside the scope of capital gains tax, with the annual exemption applied and gains above that taxed at the relevant CGT rate. Polymarket settles in USDC, which is itself a cryptoasset, and HMRC has separate guidance on disposals of cryptoassets that could in theory be applied to Polymarket activity.

In practice, most retail UK users have so far been treating prediction market profits as gambling and not declaring them. That may turn out to be correct. It may turn out to be a problem. The volumes involved are still small enough that HMRC has not put out specific guidance, but as the platforms grow, that will change.

If you are a high-volume trader, measured in thousands or tens of thousands of pounds of profit a year, the prudent step is to take the question to an accountant who is comfortable with both gambling and crypto positions. The cost of the call is small. The cost of being wrong, several years later, is not.

The US position

The US regulatory wrapper is more explicit than the UK one. The tax treatment inside it is not. Kalshi is a CFTC-regulated exchange, which settles what kind of venue it is, and settles very little about how the IRS treats what you make on it. The federal architecture is laid out in our state-by-state guide to the US legal landscape.

Profits are taxable. That much is not in doubt, and it holds whichever way the rest of this resolves. What is in doubt is the category, and the category decides the rate and the loss rules.

The IRS has issued no revenue ruling, notice, private letter ruling or other formal guidance on how prediction market event contracts are treated. In the absence of guidance, tax practitioners describe three live positions, and choosing between them is the taxpayer's risk rather than a settled fact:

• Ordinary income. The conservative position, and the one a cautious preparer will default to.
• Section 1256 treatment, giving a blended 60 per cent long-term, 40 per cent short-term rate regardless of holding period. Worth understanding precisely where the doubt sits. Section 1256(g)(7)(B) defines a qualified board or exchange to include a domestic board of trade designated as a contract market by the CFTC, and Kalshi is one, so the venue itself is not the problem. The open question is whether an event contract is the kind of contract section 1256 covers at all. Practitioners generally treat the position as an aggressive one, and CPAs who take it commonly file Form 8275 to disclose it and reduce penalty exposure on audit.
• Gambling. Not excluded, despite the derivatives wrapper, and in 2026 the worst of the three for reasons set out below.

The reason the category matters more in 2026 than it did a year ago is the loss rules. Under the One Big Beautiful Bill Act, gambling losses are deductible only up to 90 per cent of gambling winnings from the 2026 tax year, where they were previously deductible in full against winnings. A trader who breaks exactly even across a year can therefore owe tax under the gambling treatment and owe nothing under a trading treatment. That gap is the single most consequential thing on this page, and it did not exist before this tax year.

Be careful about the phrase "depending on holding period" wherever you see it applied to these contracts. Even under a capital gains reading, event contracts are short-dated by construction, so long-term treatment is effectively unreachable on a market that resolves in weeks. If you want to trade on Kalshi in the US, this is exactly the kind of question to put to a CPA before volume builds, not after.

Settlement of contracts triggers a tax event. Withdrawals from your Kalshi account do not, in themselves, but the underlying gains are taxable in the year they are realised.

Know what the platform will and will not send you. Kalshi's own tax documentation lists four forms, issued to users who meet the IRS thresholds: a 1099-INT for interest, a 1099-MISC for credits and rewards, a 1099-B for proceeds from broker transactions, which means crypto transfers rather than event contracts, and a 1099-DA for digital asset reporting. None of the four reports your event-contract gains. So a 1099-B arriving in your account does not mean your trading has been reported to anyone, and no form arriving does not mean nothing is reportable. What Kalshi does provide is a profit and loss statement, in the Tax Info section of your account. That, rather than a 1099, is where the number you need starts.

Polymarket is not relevant for US tax-resident users because the platform is geofenced out of the US. Outside the US, anyone planning to start trading on Polymarket should treat the tax question as live and unsettled in their own jurisdiction.

Practical points for both jurisdictions

Keep records. Both Polymarket and Kalshi let you export trade history. Do this monthly, store it somewhere durable, and keep a running spreadsheet of realised gains and losses. If you do end up needing to file, the spreadsheet will save you days of forensic work.

Watch the bank reporting threshold. In the UK, banks report unusual transaction patterns to HMRC. In the US, anything above 10,000 dollars triggers automatic reporting. If you are moving meaningful sums into or out of these platforms, your bank already knows. Your tax authority will know too.

Cross-border traders, take particular care. If you are a UK resident with a US bank account, or a US person living in the UK, the analysis is materially more complicated. Tax treaties exist, but they do not cover every novel asset class cleanly. This is the case where a fifteen minute call with an accountant pays for itself ten times over. Our piece on how to compare Polymarket and Kalshi walks through the cross-border venue split that creates most of these awkward edge cases.

Crypto layer for Polymarket. Because Polymarket settles in USDC, every trade arguably involves a disposal of one cryptoasset for another. HMRC's crypto guidance applies in principle. Whether and how it is enforced for prediction market activity specifically is one of the genuinely open questions. The simpler approach is to track every trade as if disposals are taxable, which is what most crypto-native traders already do.

The bottom line

In the UK, the most common assumption is that prediction market profits are not taxed, but the position is not formally confirmed and high-volume traders should get advice. In the US, profits from Kalshi are taxable and you should expect to declare them, but which category they fall into is unsettled, the IRS has published nothing, and the category now changes what a losing year costs you.

Neither position is exotic. Neither is reason to avoid the platforms. But both are reason to keep records from day one, because the cleanest tax position you will ever have is the one where you have the data ready when you need it.

The version of you in two years' time, sitting across a desk from an accountant, will be very glad you exported your trade history this month.

Frequently asked questions

Do you pay tax on prediction market profits in the UK?

HMRC currently treats profits from gambling and betting as outside the scope of income tax for individuals. Whether prediction market profits fall under that rule depends on how HMRC categorises the activity in your specific case, and the position is not yet definitively settled.

Are Kalshi profits taxable in the US?

Yes, profits are taxable. How they are taxed is not settled: the IRS has issued no guidance on event contracts, and practitioners work from three competing positions, ordinary income, Section 1256's 60/40 split, or gambling. The choice matters more from the 2026 tax year, because gambling losses are now deductible only up to 90 per cent of winnings. Kalshi does not issue a 1099-B for trades, so keep your own records. Confirm the position with a tax professional before volume builds.

How are Polymarket profits taxed?

In the UK they may fall under the same gambling-style treatment as a sportsbook win, or they may be treated as crypto disposals because Polymarket settles in USDC. The ambiguity has not been definitively resolved by HMRC. In other jurisdictions, treatment varies. US users are not permitted to use Polymarket so the question does not arise there.

Do I need to declare prediction market activity?

If your jurisdiction taxes the profits, yes. Even where profits are not taxable, declaring activity may be advisable for traders moving large sums in or out of regulated banking systems, to avoid awkward conversations with your bank or tax authority later.

Correction, 10 August 2026. An earlier version of this guide said that US profits from Kalshi are "generally subject to capital gains tax", and repeated that in the bottom line and the FAQ, while a fourth passage on the same page said the treatment was unsettled. The unsettled description was the correct one. The IRS has issued no guidance on how prediction market event contracts are taxed, and practitioners work from three competing positions. The page has been corrected to say so throughout, and now covers the One Big Beautiful Bill Act's 90 per cent cap on gambling-loss deductions from the 2026 tax year, which was missing and which makes the choice of category materially more expensive. A later pass on 10 August checked Kalshi's own tax documentation and corrected the account of which forms it issues: there are four, one of them a 1099-B covering crypto transfers, and none of them reports event-contract gains.