How are you doing? file tax on market capitalization in advance? It seems like the kind of question any decent reporter should answer. However, it is now a conundrum for tax professionals across the country. “You have a leeway,” says Patrick Camuso, an accountant who specializes in digital assets. “It puts the taxpayer at a disadvantage.”
Prediction markets have been around for decades, so this is nothing new. But platforms such as Kalshi and Polymarket have exploded in popularity since last year, which means that the question of how to make an accurate report for the profit of the market has progressed from being relevant to something more urgent than most people. Although only a small number of citizens actually use the market—about 3 percent, according to a recent study—that still means that millions of US citizens are required to report their gains and losses to the Internal Revenue Service. There is a lot of money at stake here. Kalshi, which has many US users, saw more than $12 billion in monthly revenue last month in March, according to market tracker Defi Rate.
Kalshi declined to comment. The IRS and Polymarket did not respond to requests for comment.
The IRS has not issued legal guidelines on how to approach the prediction markets, which means that people who have used this platform now have to be confused at tax time in the hope that they are not breaking the law on purpose. There are many ways to report gains and losses; others apply the law governing tax reporting on financial products (such as futures contracts and foreign exchange contracts). Others treat their predicted market gains as if they had won a lottery or simply report them as regular income and cross their fingers. Capuso describes the prediction markets as “a mix of betting contracts, derivatives, and investment contracts all put together in a unique bucket” and says it evaluates what customers owe on a case-by-case basis. “In general our firm takes a difficult position for many clients due to the uncertainty surrounding many tax laws.”
For traders who report forecast market earnings as gambling earnings, the process can be difficult. Bettors must track their earnings “per session”, which means that instead of reporting the total amount, a full record of each wager must be kept. Nate Meininger, a Phoenix-based prediction market trader, joked to X about how a lack of direction means you don’t have to declare money. However, in real life, he says he reports benefits by looking at tax documents provided by platforms like Kalshi and talking to a financial expert. “I don’t follow it either. That seems like a lot of work,” he says.
Traders of US forex markets who access Polymarket and other crypto-based platforms by using private networks are in a tricky place, since the company does not provide tax documents (and because they are legally prohibited from using unregistered forms). Since US citizens are required to report income regardless of its source, traders who buy contracts on Polymarket and its affiliates must report their income. “Foreign exchanges are more difficult,” Meininger says.
Changes to the IRS could make things even more difficult. The tax office is in the midst of a major overhaul, with another modernization effort being led by staff from the so-called Department of Government Efficiency. It is currently pursuing complex strategies to determine which taxpayers should be audited; last year, the IRS paid Palantir $1.8 million to develop a custom tool designed to flag “high-quality” audit cases, as WIRED recently reported.
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