Most coverage of prediction market taxes treats Kalshi and Polymarket as two flavors of the same thing: place a bet, win or lose, report the outcome. That framing misses the actual complexity, and for Polymarket specifically, it misses something bigger. Polymarket isn’t just a betting platform that happens to use crypto for payments. It’s a crypto activity wearing a trading costume, and every position you take there is layering a second tax event on top of the one you think you’re making.
Polymarket’s Crypto Layer Is the Real Bookkeeping Problem
When you take a position on Polymarket, you aren’t handing over dollars. You’re typically funding the position with USDC or another crypto asset, and that asset itself has its own cost basis and its own gain or loss profile, separate from whatever happens with your prediction. If the crypto you used to fund the position appreciated between when you acquired it and when you deployed it into the market, that appreciation is arguably its own taxable disposal, independent of whether your prediction turns out to be right.
This means a single Polymarket trade can generate two distinct layers of gain or loss stacked on top of each other: the crypto-to-crypto or crypto-to-contract conversion event, and the eventual resolution of the bet itself. Treat it as one transaction and you will misstate at least one of those two legs, almost certainly in a way that understates what you actually owe. This is the layer that generic “how prediction market taxes work” coverage skips entirely, and it’s the layer that actually requires real crypto accounting infrastructure, not a spreadsheet built for tracking wins and losses.
Which Form You’re Actually Filing On Is Not Settled
Ask three tax practitioners how Kalshi or Polymarket activity should be reported and you may reasonably get three different answers, because the character of the income genuinely isn’t nailed down yet. There are several live candidates, and which one applies changes your tax rate and your reporting obligations substantially.
Gambling-style treatment would run winnings through as ordinary “other income,” typically the framing behind a Form W-2G or a 1099-MISC when a platform issues one at all, with losses only deductible as itemized deductions and capped at winnings. Section 1256 contract treatment, plausible for Kalshi given its CFTC-regulated exchange status, would instead run gains and losses through Form 6781 with the blended 60/40 long-term/short-term rate, marked to market at year end regardless of holding period. Capital asset treatment would push activity onto Form 8949 and Schedule D like a conventional investment. Each of these is a real, defensible position under different reasonable readings of how these contracts function, and the form you file on is not a formality. It’s a substantive decision about how much tax you owe and at what rate.
Polymarket complicates this further because, unlike Kalshi, there is no CFTC designation to anchor a Section 1256 argument to at all. Its activity is more naturally read through a capital asset or gambling lens, but because it settles in crypto rather than dollars, it also inherits every open question in crypto tax treatment on top of the prediction market question. You are not choosing one unsettled area of tax law. You are stacking two of them.
If You’re Running a Strategy, You’re Running a Business
Placing an occasional bet is one thing. Running a systematic strategy across Kalshi and Polymarket, sizing positions, managing a bankroll, executing repeatedly across many events, is functionally operating a trading business, and the tax and accounting requirements change accordingly. That means evaluating whether trader tax status applies, whether the activity is subject to self-employment tax if structured as a trade or business, whether quarterly estimated payments are now required given the income pattern, and whether the whole operation should sit inside a formal entity rather than a personal account.
It also means the bookkeeping has to be built for it from the start. A real strategy generates enough volume that reconstructing cost basis and contract-level gain or loss after the fact, across two platforms with two different settlement mechanisms, is a genuinely large project. The businesses that get this right are tracking crypto cost basis, contract resolution, and platform-level activity separately and continuously, not trying to back into it from wallet history once a year.
The Straddle Problem Nobody’s Talking About
Here is the piece almost no coverage of prediction market taxes mentions at all. If you are running offsetting positions on the same event across both platforms, betting one way on Kalshi and the opposite way on Polymarket as a hedge, you may be creating a straddle for tax purposes. The tax code’s straddle rules exist specifically to stop taxpayers from recognizing a loss on one leg of an offsetting position while leaving the matching gain unrealized, and they can defer the loss you’re counting on until the offsetting position closes too.
For a strategy explicitly built around hedging exposure across two prediction market platforms, this isn’t a hypothetical edge case. It’s a structural feature of exactly the kind of trading that makes running both platforms together appealing in the first place, and it needs to be accounted for in how the strategy is modeled, not discovered after a return is filed.
What This Actually Requires
Treat Polymarket activity as a crypto transaction first and a prediction market bet second, because that is the order the tax consequences actually stack in. Decide deliberately which form and which character of income applies to your Kalshi activity, and document the reasoning rather than defaulting to whatever a generic tax product assumes. If you are running real volume or hedging across both platforms, build the accounting infrastructure for a trading business, not a hobby, before the volume outgrows a simple record.
By Javier Caceres, Co-Founder & COO, Fortress Accounting
Javier Caceres is Co-Founder and COO of Fortress Accounting (fortress-accounting.com), a firm specializing in accounting and advisory services for crypto/Web3, fintech, and money transmitter businesses. Connect on LinkedIn: linkedin.com/in/caceresjavier.
