Prediction markets have moved quickly from a niche trading activity into the mainstream. These markets are exchange-based platforms where individuals buy and sell contracts tied to the outcome of a future event—such as election results, inflation reports, Federal Reserve decisions, sporting events, technology launches, entertainment outcomes, and other real-world events.
Each contract’s price reflects the market’s collective estimate of that outcome’s probability. Participants trade these contracts with one another (rather than against the “house”), so prices shift as buyers and sellers react to new information and adjust their positions accordingly. The tax reporting infrastructure has not developed at the same pace. The lack of clear IRS guidance creates significant gray areas in interpreting and applying tax law.
However, in its August 2026 Tax News, the California Franchise Tax Board specifically addressed prediction markets, reminding California residents that they generally must report taxable income earned through these platforms even if they receive no Form 1099 or other tax document.
For active users, the practical issue is no longer simply whether a platform sends a tax form. It is whether the taxpayer has enough information to determine what happened during the year and how each type of activity should be reported.
No 1099 does not mean no taxable income
Federal tax law broadly includes income from whatever source derived in gross income unless a specific exclusion applies. California similarly taxes residents on income from all sources. A Form 1099 is an information-reporting tool. It does not determine whether income is taxable.
That means a taxpayer who earns $20,000 through prediction-market activity cannot assume the income disappears from the return because the platform did not issue a tax document. The taxpayer still needs to identify the transactions, calculate the relevant gains and losses, and determine the appropriate federal and California treatment.
Prediction-market gains do not necessarily have one tax treatment
The FTB’s August notice confirms the reporting obligation, but it does not classify all prediction-market contracts the same way. Federal characterization may depend on the specific contract, the platform on which it trades, and the taxpayer’s activity.
Potential tax regimes may include wagering rules, capital gain and loss rules, or the specialized rules for certain Section 1256 contracts. A contract does not receive Section 1256 treatment simply because it involves a prediction or trades on a regulated platform. The statutory requirements need to be evaluated for the particular instrument.
If a contract qualifies for Section 1256 treatment, gains and losses are generally marked to market at year-end and reported on Form 6781, with the resulting gain or loss generally treated as 60% long-term and 40% short-term for federal purposes.
If an activity instead falls under federal wagering rules, the loss limitations can produce a very different result. Under OBBBA (One Big Beautiful Bill Act), beginning with tax years after 2025, federal law generally limits the deduction for wagering losses to 90% of those losses and no more than the amount of wagering gains. Wagering losses are reported on Schedule A as an itemized deduction. The classification can therefore affect not only where an item appears on the return, but also how much loss is available to offset income.
Taxpayers should avoid applying one treatment across every prediction platform or contract without reviewing the underlying instrument.
California creates another layer of analysis
California residents are generally taxed on income from all sources, including prediction-market income earned through platforms located outside California.
California also does not provide a preferential tax rate for capital gains. If an item is treated as capital gain, California generally taxes that gain at the same rates that apply to ordinary income.
Federal and California results can also diverge when the states do not follow the same federal provisions or limitations. Prediction-market users with significant activity should therefore calculate the California position separately rather than assuming the federal return determines the state result.
What records should prediction-market users keep?
The FTB specifically recommends detailed transaction records. Waiting until tax preparation to reconstruct hundreds or thousands of contracts can make the reporting process significantly harder.
Taxpayers should preserve:
- Complete transaction histories downloaded from each platform
- Contract descriptions and event names
- Purchase and sale dates
- Amounts paid for each position
- Settlement proceeds
- Realized gains and losses
- Trading and transaction fees
- Deposits and withdrawals
- Open positions at year-end
- Any Forms 1099 or account statements eventually issued
Investors using multiple platforms should also reconcile cash transferred into and out of each account. A withdrawal is not necessarily the same as taxable income, and a deposit is not necessarily deductible. Transaction-level data provides the information needed to distinguish principal from actual economic gain or loss.
Tell your tax advisor before the reconciliation starts
Prediction-market activity should be disclosed to the tax preparer even when no tax form appears in the organizer.
This becomes particularly relevant for investors who also trade stocks, options, cryptocurrency, digital assets, or other alternative investments. Different transaction categories can be subject to different gain, loss, timing, and reporting rules.
Significant prediction-market income may also affect quarterly estimated tax payments. A profitable trading year can increase federal and California tax obligations well before the return is filed.
How Aura Advisors can help with prediction market taxes
Prediction markets combine a new investment format with tax rules that were not written around a single modern platform or product.
Aura Advisors can help investors review prediction-market activity, organize transaction records, evaluate the appropriate federal and California reporting treatment, and incorporate taxable gains into year-end projections and estimated tax planning.
The best starting point is a complete transaction history, not a search for a missing Form 1099. With the underlying records in place, taxpayers can evaluate the character of the activity and build a reporting position that reflects what actually occurred during the year.
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