For traders who report prediction market profits as gambling profits, the process can be onerous. Gamblers must track your winnings “per session,” which means that instead of reporting a net amount, a thorough record must be kept of each bet. Nate Meininger, a Phoenix-based prediction market trader, joked to X about how the lack of guidance means you don’t need to report income. However, in real life, he says he makes profits by looking at tax documents offered by platforms like Kalshi and consulting with an accountant. “I don’t follow it myself,” he says. “That seems like a lot of work.”
US-based prediction market traders who access Polymarket and other cryptocurrency-based platforms using virtual private networks are in a particularly difficult situation since the company does not issue tax documentation (and because they are legally prohibited from using unlicensed platforms). As US citizens are required to declare their income regardless of its source, traders who purchase contracts on Polymarket and the like must declare their earnings themselves. “Offshore exchanges are more difficult,” says Meininger.
Changes to the IRS may complicate matters even further. The tax agency is in the midst of a major reform, with some modernization efforts headed by agents of the so-called Department of Government Efficiency. It is currently applying more sophisticated strategies to identify which taxpayers to audit; last year, the IRS Palantir paid $1.8 million to improve a custom tool designed to flag “high-value” audit cases, as WIRED recently reported.
The ambiguity around prediction markets and taxes resembles the confusion over how to report cryptocurrency profits at the beginning of the blockchain boom. The IRS initially provided guidance for cryptocurrencies in 2014, five years after Bitcoin went live, and updated it significantly in 2019; It was not until 2023 that crypto exchanges were legally required to submit tax forms and report transaction data to the IRS. There appears to be a similar gap between adoption and standards development this time. Meanwhile, some traders are betting that authorities will be lenient about potential mistakes.
“There is still no right way to apply,” Meininger says. “It would be strange for the IRS to expect someone to know something that is impossible to know.”
This story originally appeared on wiring.com.
