Americans Have Bet More Than $220 Million on the Midterms. Are Those Winnings Taxable?
Americans aren't just watching the 2026 midterm elections. Increasingly, they're putting money on the results.
More than $220 million has already been traded on congressional election outcomes through prediction markets such as Kalshi and Polymarket, according to research highlighted in an October Reuters investigation.
That's more than double the $92 million recorded during the entire 2024 congressional election cycle.
And with Election Day approaching on November 3, the market continues to attract attention from traders, regulators, and lawmakers.
But there's another group that should be paying attention: taxpayers.
As prediction markets grow, an important question remains unresolved. When someone makes money betting on an election, does the IRS treat that profit as gambling income, an investment gain, or something else entirely?
The answer could make a substantial difference when tax season arrives.
How Did Election Betting Become a $220 Million Market?
Prediction markets allow participants to trade contracts based on the outcomes of future events.
Instead of purchasing traditional stocks or placing a conventional sportsbook wager, users buy contracts tied to specific questions.
For example, a market might ask whether a particular candidate will win a Senate race or whether one party will control the House of Representatives.
Contracts generally trade at prices reflecting what participants are willing to pay for a particular outcome.
A contract purchased for 40 cents that pays $1 if the predicted event occurs would generate a 60-cent profit if held through a successful resolution, before applicable fees.
If the prediction is incorrect, the contract may expire worthless.
Platforms such as Kalshi and Polymarket have expanded the range of available markets considerably.
According to Reuters, researchers at the Anti-Corruption Data Collective examined more than 21,000 markets related to the 2026 congressional elections.
Interestingly, only 16% of those markets focused directly on who would win a race. Most of the newer contracts concerned more specific outcomes, including victory margins and voter turnout.
The expansion illustrates how election-related trading has evolved beyond straightforward predictions about winning candidates.
Who Is Actually Making These Bets?
Although prediction markets are attracting more attention, the trading activity isn't necessarily spread evenly across millions of participants.
Reuters reported that the top 1% of wallets on Polymarket's international platform accounted for approximately 70% of congressional election trading volume during the current cycle.
Trading has also been concentrated in a relatively small number of competitive races.
The Texas Senate contest, along with Senate races in Maine, Michigan, and South Carolina, has attracted substantial activity.
That concentration raises questions about how representative prediction market prices really are.
Supporters argue that financial incentives encourage participants to incorporate information into market prices, potentially producing useful forecasts.
Critics question whether relatively small groups of wealthy or highly active traders could influence prices, particularly in markets with limited liquidity.
A separate Anti-Corruption Data Collective analysis found that many congressional markets were vulnerable to substantial price movements from comparatively small orders.
The research does not establish that every price movement is manipulation, but it highlights the importance of distinguishing trading activity from reliable evidence about election outcomes.
Are Election Betting Winnings Taxable?
Generally, profits from prediction market activity should not be assumed to be tax-free.
However, determining exactly how those profits should be reported is more complicated than it might appear.
Traditional gambling winnings are generally taxable under federal law. Profits from stocks and other investments may also be taxable, but different rules govern the rates, timing, and treatment of losses.
Prediction market contracts exist in an area where those categories can overlap.
According to an August 2026 Bipartisan Policy Center analysis, experts have identified three potential approaches to taxing prediction market transactions:
Gambling income
Capital gains or losses
Section 1256 contract gains or losses
Each approach could produce a different tax result, even when a trader earns the same amount of money.
The IRS has not established a comprehensive, universally applicable federal tax classification for every type of prediction market contract.
Consequently, taxpayers should not assume that all Kalshi or Polymarket transactions receive identical treatment.
What If the IRS Treats Prediction Market Profits as Gambling Income?
If prediction market activity is classified as gambling, winnings generally become taxable ordinary income.
This matters because gambling income is not necessarily taxed the same way as investment gains.
It also matters because Congress changed the federal rules governing gambling loss deductions.
Beginning in 2026, federal law generally limits the deduction for qualifying gambling losses to 90% of those losses, subject to the applicable rules and the amount of gambling winnings.
Consider a simplified example.
A taxpayer has $10,000 in gambling winnings and $10,000 in gambling losses during the year.
Economically, the taxpayer broke even.
However, under the 90% limitation, only $9,000 of those losses may be deductible.
That could leave the taxpayer with $1,000 of taxable gambling income despite having no overall profit.
The example assumes the taxpayer otherwise qualifies to deduct the losses. Gambling loss deductions are generally claimed by taxpayers who itemize, and additional restrictions can apply.
The key point is that breaking even financially does not necessarily mean breaking even for tax purposes.
Whether this particular rule applies to a prediction market transaction depends on how the activity is classified.
Could Election Betting Profits Be Taxed Like Stock Investments?
Possibly.
Another interpretation is that certain prediction market contracts produce capital gains or losses.
Under general capital gains rules, the length of time an asset is held can affect the tax rate.
Short-term capital gains are generally taxed at ordinary income tax rates, while qualifying long-term capital gains may receive preferential rates.
However, prediction market contracts often settle within relatively short periods, making long-term holding treatment less common for many election-related trades.
Capital loss rules also differ from gambling loss rules.
Generally, capital losses can offset capital gains, and individuals may be able to deduct up to $3,000 of additional net capital losses against ordinary income annually, with unused losses carried forward.
That creates a potentially important distinction for people who make numerous trades throughout the year.
A taxpayer with substantial winning and losing positions could face very different tax consequences depending on whether the activity is classified as gambling or investment trading.
What Are Section 1256 Contracts?
A third possibility involves Section 1256 of the Internal Revenue Code.
Certain qualifying financial contracts receive special tax treatment, including an annual mark-to-market requirement and a split between long-term and short-term capital gains.
Under the commonly referenced 60/40 rule, 60% of qualifying gains or losses are treated as long-term, and 40% are treated as short-term, regardless of the actual holding period.
That can be advantageous compared with ordinary short-term capital gains treatment.
However, the fact that a prediction market operates under federal commodities regulation does not automatically establish that every contract qualifies for Section 1256 treatment.
The classification depends on the relevant tax law and the characteristics of the contract.
Tax professionals and legal analysts continue to examine whether different prediction market products qualify for this treatment.
A White & Case analysis explains why the distinction among gambling income, capital gains, and Section 1256 treatment remains important for participants and platforms.
Why Are Regulators Concerned About Election Prediction Markets?
Tax treatment isn't the only unresolved issue.
Prediction markets have also raised questions about regulatory oversight, potential insider trading, and the integrity of election-related information.
Kalshi operates as a federally regulated derivatives exchange, while Polymarket has operated through different platforms serving different markets and jurisdictions.
The Commodity Futures Trading Commission has asserted authority over certain event contracts, while some state regulators have challenged whether particular products constitute gambling subject to state law.
Election contracts introduce additional concerns because some participants may possess nonpublic information about campaigns or political developments.
Reuters reported that Kalshi has suspended candidates for trading on their own races and that campaign workers have also been identified participating in election markets.
Platforms maintain that they have monitoring and enforcement systems designed to detect improper activity.
On October 22, Reuters also reported that CFTC enforcement officials were examining suspicious trading activity in prediction markets, including potential misconduct involving election contracts.
These questions remain separate from the federal tax classification of profits, although the legal treatment of prediction markets could influence how the industry develops.
What Should Taxpayers Who Trade on Kalshi or Polymarket Do?
Anyone participating in prediction markets should approach recordkeeping with the same seriousness they would apply to other potentially taxable financial activity.
That includes maintaining records of contract purchases, sale proceeds, settlement payments, transaction fees, and losses.
Taxpayers should also preserve transaction histories from the platforms they use rather than assuming those records will remain available indefinitely.
Depending on the platform, product, and applicable reporting requirements, participants may receive tax information forms. However, the absence of a tax form does not automatically mean that income is exempt from reporting.
For platforms that involve cryptocurrency transactions, recordkeeping can become more complicated because digital asset transactions may create separate federal tax consequences.
Before preparing a return, taxpayers with significant prediction market activity should consult a qualified tax professional familiar with the evolving treatment of event contracts.
This is especially important for active traders with numerous winning and losing positions, because the classification of those transactions can materially affect their reported taxable income.
Prediction markets have turned the 2026 midterm elections into a substantial financial trading event, with more than $220 million in congressional election contracts already changing hands.
But the rapid growth of platforms such as Kalshi and Polymarket has outpaced clear answers to some important tax questions.
Whether profits are treated as gambling winnings, capital gains, or qualifying financial contract income could affect how much tax participants owe and whether their losses are deductible.
Taxpayers who participate in these markets should keep detailed records, avoid assuming that losses will fully offset winnings, and seek professional guidance before filing their returns.
What Is the Most Conservative Way to Report Prediction Market Profits?
Because the IRS has not issued comprehensive guidance establishing a single tax treatment for all prediction market contracts, taxpayers face uncertainty when deciding how to report their gains and losses.
One conservative approach discussed by tax professionals is to treat taxable profits as ordinary income rather than claiming potentially preferential capital gains or Section 1256 treatment.
Under this approach, qualifying net profits may be reported as other income on Schedule 1 (Form 1040), Line 8z, depending on the nature of the transactions and the taxpayer's circumstances.
This approach generally avoids claiming a preferential tax rate. However, it is not an IRS-approved safe harbor, and reporting income at ordinary rates does not, by itself, resolve whether individual contract losses may be netted against gains.
Another conservative framework is to treat election prediction contracts as wagering transactions.
Under that interpretation, winnings would generally be reported as ordinary gambling income, while losses would be subject to the applicable gambling loss deduction rules.
Beginning in 2026, deductible wagering losses are generally limited to 90% of qualifying losses, up to the amount of gambling winnings. Those deductions generally require itemizing rather than taking the standard deduction.
Consequently, a taxpayer could owe federal income tax even after breaking even or losing money overall.
Neither approach should be treated as universally correct for every prediction market transaction. The appropriate reporting method depends on the contract's characteristics, applicable tax rules, and the taxpayer's individual circumstances.
For taxpayers seeking a cautious reporting position, the priority should be fully reporting taxable income, avoiding unsupported preferential treatment, and obtaining professional advice from our office before offsetting gains with losses.
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