For traders who report prediction markets earnings as gambling winnings, the process can be onerous. Bettors must track their winnings on a “per session” basis, which means that instead of reporting a net amount, a thorough record of each wager must be kept. Nate Meininger, a Phoenix-based prediction market trader, has joked on X about how the lack of guidance means you don’t have to declare the income. In real life, however, he says he reports gains by looking at the tax documents offered by platforms like Kalshi and consulting with an accountant. “I don’t track it myself,” he says. “That seems like a lot of work.”
US-based prediction market traders who access Polymarket and other crypto-based platforms by using virtual private networks are in an especially tricky spot, since the company does not issue tax documentation (and because they are legally banned from using unlicensed platforms). As US citizens are obligated to report income regardless of its source, traders who buy contracts on Polymarket and its ilk must self-report their earnings. “The offshore exchanges are harder,” Meininger says.
Changes at the IRS may make things harder still. The tax agency is in the middle of a significant overhaul, with some modernization efforts spearheaded by operatives from the so-called Department of Government Efficiency. It is currently pursuing more sophisticated strategies to identify which taxpayers to audit; last year, the IRS paid Palantir $1.8 million to improve a custom tool designed to flag “high-value” auditing cases, as WIRED recently reported.
The ambiguity around prediction markets and taxes resembles the confusion around how to report cryptocurrency profits at the beginning of the blockchain boom. The IRS initially provided guidance for crypto in 2014, five years after Bitcoin went live, and significantly updated it in 2019; it wasn’t until 2023 that crypto exchanges were legally obligated to send tax forms and report transaction data to the IRS. It looks as though there’s a similar lag between adoption and rule-making this time around. In the meantime, some traders are betting that authorities will be lenient about potential mistakes.
“There’s not really a correct way of filing yet,” says Meininger. “It would be odd for the IRS to expect someone to know something that’s impossible to know.”
This story originally appeared on wired.com.