TL;DR / Key Takeaways

Kalshi winnings are taxed as ordinary income, not capital gains. The rate is higher than most traders expect.
Kalshi issues a 1099-MISC at $600 in net winnings, but you owe taxes below that threshold too. The form is not the trigger. Profit is.
Platform reporting is minimal. You need your own trade log, and the Predict & Profit bot writes every trade decision to a database for exactly this reason.
Trading through an LLC like ItsMoreThanSoftware changes the reporting structure but does not reduce your tax rate on its own.

This is not tax advice. I am a data engineer, not a CPA or tax attorney. Nothing in this post should be taken as a professional tax recommendation. Talk to a qualified tax professional before making any decisions. What I can do is share what I found when I dug into this myself, with citations, so you can have an informed conversation with someone who is actually licensed to give you advice.

That said, I was surprised how little clear information exists for prediction market traders specifically. Most tax content is written for stock traders or crypto holders. Prediction markets are different in some important ways.

Ordinary Income, Not Capital Gains

The first thing I had to internalize: prediction market winnings are not treated like stock gains.

When you sell a stock you have held for more than a year, you pay long-term capital gains rates, which top out at 20% for most high earners. Short-term stock gains are taxed as ordinary income, but at least the framing is there.

Prediction market contracts are generally treated as gambling winnings under the Internal Revenue Code. The IRS classifies these as ordinary income, reported on Schedule 1 (Form 1040), Line 8b. The relevant IRS guidance is Publication 525, "Taxable and Nontaxable Income," which includes a section on gambling winnings.

If you are in the 32% federal tax bracket, your Kalshi net winnings get taxed at 32%. Not 15%. Not 20%. Thirty-two percent, plus whatever your state takes.

This matters a lot when you are calculating whether a trade is worth making. Your post-fee, post-tax return is the only number that counts.

The 1099 Threshold Is Not the Tax Threshold

Kalshi is required to issue a 1099-MISC when your net winnings reach $600 in a calendar year. This is the reporting threshold, not the tax threshold.

If you net $400 in Kalshi winnings, you will not receive a 1099. You still owe taxes on that $400. The IRS is clear on this: all gambling winnings are taxable income regardless of whether you receive a form. Publication 525 states this explicitly.

The 1099 just means Kalshi is also telling the IRS about your winnings. Below $600, they are not required to tell the IRS. You still are.

I bring this up because I have seen people in trading communities treat the 1099 threshold as a tax-free zone. It is not. The threshold is about platform reporting obligations, not your tax obligations.

What Kalshi Actually Reports and Why It Is Not Enough

Kalshi provides basic account history. You can see your transactions. What you cannot easily get is a clean, reconciled record of net profit per market, cost basis per position, hold duration, or a breakdown of fees paid.

If you are trading actively, the platform's built-in reporting is not sufficient to do your taxes accurately. You need your own records.

This is one of the practical reasons the Predict & Profit bot logs everything to a database. Every trade decision, every fill, every skip reason, every settlement. The PostgreSQL schema tracks entry price, exit price, contracts, fees, and outcome. At year end, a simple query gives you a clean P&L that you can hand to a CPA.

If you are trading manually or using a bot that does not keep detailed records, you are building a problem for yourself that compounds every month you let it go.

Netting Losses: The Gambling Loss Deduction Trap

Here is where it gets unpleasant.

If you win $3,000 on some trades and lose $2,000 on others, you cannot simply report $1,000 in net income. Under IRS rules for gambling, you report the full $3,000 as income and then deduct the $2,000 in losses, but only if you itemize deductions, and only up to the amount of your winnings.

You cannot use gambling losses to offset other income. And if you take the standard deduction, you get zero benefit from the losses at all. The losses just disappear.

This asymmetry is brutal. Your wins are fully taxable. Your losses are partially or completely useless as deductions depending on your filing situation.

IRS Publication 529, "Miscellaneous Deductions," covers the gambling loss deduction rules. Worth reading if you are in a loss year.

There is a narrow exception for "professional gamblers" who can report winnings and losses on Schedule C as a business activity, which allows them to offset other income. The bar for qualifying as a professional gambler under IRS criteria is high. The IRS looks at factors like whether you pursue trading as a primary livelihood and with regularity and continuity. Losing your day job and trading from a couch does not automatically qualify you. Tax courts have ruled on this repeatedly and most casual traders do not meet the standard.

Trading Through an LLC: What Changes and What Does Not

I run ItsMoreThanSoftware LLC as the business entity for my side projects. The bot source code sales flow through it. My Kalshi trading account is personal.

This is a distinction worth understanding.

If you trade through a single-member LLC, the default tax treatment is pass-through. The LLC itself does not pay taxes. The income flows directly to your personal 1040, just like if you traded individually. The LLC structure does not reduce your tax rate on trading income. It does give you cleaner separation between business income and personal income, and it creates a legal entity that can hold contracts and open business accounts.

For my situation, the software sales are LLC income. The Kalshi trading is personal income. I keep them completely separate.

A multi-member LLC or an S-Corp election introduces more complexity and potential planning opportunities, but also more compliance cost. If you are clearing meaningful money from trading and running it as a business, the conversation with a CPA about entity structure is worth having. The cost of that conversation is almost always less than the cost of getting it wrong.

One practical note: some traders ask whether they can deduct bot-related expenses (server costs, API fees, development time) against trading income. If you are trading as an individual, this is difficult. If you are operating as a business that happens to trade, the expense treatment is more defensible. This is another area where the LLC structure provides more flexibility, but you need professional guidance to do it correctly.

Keeping Your Own Records: The Minimum Viable Tax Log

If you are not running a bot that logs everything automatically, here is what you need to track manually for every trade:

Date and time opened
Market name and strike
Contracts purchased
Entry price per contract
Date and time closed or settled
Exit price per contract (or settlement value)
Fees paid (Kalshi charges per contract)
Net profit or loss in dollars

At minimum, a spreadsheet. Ideally a database. If you are using the Predict & Profit bot, this is already handled. The trade_decisions table stores every entry, exit, and skip with timestamps. Running a year-end summary is a SQL query.

The reason to keep your own records rather than relying on Kalshi's export is that you need cost basis and fee data in a format you can actually reconcile. Platform exports are often inconsistent in formatting, miss partial fills, or do not break out fees clearly. Your own log is the authoritative source.

The Short Version

Kalshi winnings are ordinary income. The 1099 is not the tax trigger, profit is. You cannot net losses against other income unless you itemize and have enough winnings to offset. Trading through an LLC changes your reporting structure but not your tax rate by default. Keep your own records because the platform's are not sufficient.

If you are making real money on prediction markets, the conversation with a CPA is not optional anymore. The rules are not complicated, but they are easy to get wrong, and the asymmetry between how wins and losses are treated means the tax bite is larger than most traders expect going in.

I wish someone had told me this before my first full year of trading. Consider this me telling you now.

IRS Publication 525 (Taxable and Nontaxable Income): https://www.irs.gov/pub/irs-pdf/p525.pdf IRS Publication 529 (Miscellaneous Deductions): https://www.irs.gov/pub/irs-pdf/p529.pdf IRS Form 1040 Schedule 1 instructions: https://www.irs.gov/instructions/i1040s1

Tax Implications of Prediction Market Trading: What I Learned the Hard Way