Even the tax expert who won big betting against DOGE on Kalshi is still figuring out how to file his taxes

• Alan Cole is a tax expert who says he won big betting against DOGE on Kalshi.
• The IRS has been silent on prediction markets, and Cole told BI guidance would be appreciated.
• Experts said there are a few ways things could shake out.

Even tax nerds are stumped by prediction markets.

Take Alan Cole. The 37-year-old senior economist at the right-leaning Tax Foundation told the Wall Street Journal that he used Kalshi to bet much of his life savings — $342,195.63 — against DOGE making major cuts to federal spending.

It paid off. Cole said he made $470,300 after government spending increases last year, netting a profit of around $128,000 — a 37% return.

But when it comes to recording his bounty on IRS forms, even Cole is flying somewhat blind.

"It's far from clear whether Kalshi more resembles futures trading, which could go under something like section 1256, or gambling income, which could go as normal ordinary income on the 1040," Cole told Business Insider in an email. "The 1256 treatment is likely more taxpayer-favorable in most cases, but a bit more complex."

Cole's situation is indicative of a larger issue that may plague the filers who bet on everything from snowfalls to MrBeast.

Prediction markets like Kalshi and Polymarket are booming, but the IRS has been tight-lipped about how wins should be reported. It's unclear whether they're investment income, gambling income, or something else entirely.

"Greater IRS guidance on the issue would be appreciated, and might allow these markets to issue proper 1099s for trading gains," Cole said, noting that Kalshi issues 1099 forms — typically used to record many kinds of nonwage income — for interest accrued on the platform's accounts and for miscellaneous rewards it gives to users.

"I intend to report my income in good faith but guidance could help," he said.

Tax pros feel the same way

The accounting firm Baker Tilly started fielding prediction-market questions after the popularity of the platforms boomed in 2024, said James Creech, an attorney at the firm. The presidential election that year drew lots of speculation, including from a Polymarket trader going by the name Théo, who reportedly banked $85 million by betting on Donald Trump's victory.

Théo wasn't the only person to trade significant volumes that year, and the election markets weren't the only ones that drew traders.

"We get a lot of weird stuff from the young adult children of our established clients," Creech said, "which is really how this first started coming up."

The 2025 sports prediction-markets rush has spurred more questions. Many platforms haven't provided much in the way of answers.

While Kalshi, a US-regulated prediction market, issues 1099 tax forms for some things, they may not cover all of the income a user has to report, and others don't issue any tax forms at all. Robinhood, the finance app that connects many users to Kalshi markets, doesn't issue them for prediction markets, although it does allow users to download a detailed trading history.

The IRS and Treasury Department did not respond to a request for comment. Kalshi declined to comment, Polymarket didn't respond to a request for comment, and Robinhood provided information from its website.

Cameron Browne, a certified public accountant whose firm Darien Advisors has hundreds of clients with prediction-markets activity, said the way that income gets reported depends on each client's facts and attitude — "where we're vibing at," he said.

For taxpayers who use blockchain-based prediction markets like Polymarket, Browne said, it's defensible to treat the proceeds of wagers as capital gains. The IRS treats cryptocurrency as property, and in the case of a successful bet, he said, it's the same as if property appreciated.

Generally, capital gains on assets held for less than a year, called "short-term," are taxed as ordinary income. For a single person who made between $48,476 and $103,350 in ordinary income last year, each additional dollar is taxed at a marginal rate of 22%.

But long-term capital gains are taxed at a lower rate — 15% — all the way up to $533,400 in income, for a single person.

For clients who use dollar-denominated exchanges like Kalshi, Browne and others said, different standards might apply. Under section 1256 of the Internal Revenue Code, which is frequently cited in online forums by prediction-market diehards, "regulated futures contracts" and certain options can qualify for a blend of short-term and long-term capital gains tax treatment, which could mean savings for big earners.

Despite the buzz, Section 1256 is not a magic, tax-reducing bullet.

Andy Howlett, an attorney at the firm Miller & Chevalier, laid out a hypothetical. Let's say someone buys a contract in early 2026 — wagers on prediction markets are known as "event contracts" — that would pay out if the University of Michigan wins a national football championship in early 2027.

Section 1256 would require that the contract be taxed at its market value as of December 31, 2026 — even if, shortly after, Michigan loses, and the value of the contract goes to zero.

In that situation, "I don't want to have to pay taxes on it if I haven't won anything yet," Howlett explained. "Most people are not going to want that. And that is a harsher result than even just treating it as gambling income."

In the US, gambling income is like ordinary income; people who gamble significant amounts are typically issued a Form W-2G by a casino or sportsbook. Previously, gamblers could offset 100% of their losses against their winnings on their taxes. Starting in 2026, only 90% of a gambler's losses can be deducted from their winnings — meaning that even if gamblers just break even, they would owe the IRS money.

Gambling losses also can't be deducted from any other kind of income. As a result, few people would want to characterize their prediction-markets activity as gambling, even though some tax professionals believe that it is the most appropriate treatment.

The bottom line: You have to pay the taxes

As with gambling, most prediction market users lose money. But if you made money, you have to report it. That's the case whether your exchange issued a Form 1099 or not, and whether you used a US-regulated, dollar-denominated exchange like Kalshi or an offshore cryptocurrency exchange like Polymarket.

"Some platforms may actually issue 1099s, others may not," Mark Gallegos, a CPA and tax partner at Porte Brown, said. "And the obligation to report income exists whether the form is issued or not."

Creech, the Baker Tilly lawyer, said it can also be important to record net losses. If the IRS issues guidance or the law becomes clearer a few years down the road, he said, a taxpayer will be in a better position if they can say they made a real effort to figure out the law and follow it.

He offered up a scenario in which a person had winnings of $105,000 and losses of $110,000. "You say, 'I'm not going to worry about the income side of it, because overall, I'm down.' That's a dangerous road to go down," he said.

If there's one thing CPAs and lawyers who have considered prediction markets agree on, it's that it's reasonable to disagree about the tax treatment of gains and losses. (And, of course, that you should pay a tax lawyer or an accountant for an opinion.)

For Cole, how he reports his DOGE-bet winnings isn't as urgent as it may be for other wagering filers.

"I didn't book my gains until this year, so I have another year to wait and see if guidance or professional opinion coalesces," he said.

Have a tip? Contact these reporters via Signal at jnewsham.77 and julianakaplan.33 or email at jnewsham@businessinsider.com and jkaplan@businessinsider.com. Use a personal email address and a nonwork device; here's our guide to sharing information securely.