Prediction Market Phantom Income: The 2026 Tax Trap Nobody Warned You About
If you traded on Kalshi, Robinhood Predictions, or FanDuel Predicts in 2026, a new law means you could owe taxes even if you broke even or lost money net. Here's exactly how it works.
Quick Answer
The One Big Beautiful Bill Act (OBBBA) caps gambling loss deductions at 90% of winnings starting January 1, 2026. If you won $500 and lost $500 on prediction markets, you can only deduct $450 — leaving $50 of "phantom income" you owe tax on despite breaking even. This only affects traders who itemize deductions. Standard deduction users are not affected.
What Changed: The OBBBA 90% Rule
Before 2026, gambling losses were fully deductible up to your total gambling winnings on Schedule A. The OBBBA changed that.
✅ Before 2026 (2025 tax year)
The question: "Break-even trader: $1,000 wins, $1,000 losses"
Wins (taxable income): $1,000
Losses (deductible, Sch A): −$1,000
Possible outcomes
Full losses deductible. Net taxable income: $0.
⚠️ Starting Jan 1, 2026 (OBBBA)
The question: "Same break-even trader: $1,000 wins, $1,000 losses"
Wins (taxable income): $1,000
Losses (90% cap): −$900
Phantom income (undeductible): $100
Possible outcomes
You broke even but owe tax on $100 of phantom income.
The Formula
Taxable phantom income = Total losses − (0.9 × Total wins)
If the result is greater than zero, that's phantom income you may owe federal tax on.
⚠️ Important disclaimer: Tax classification of prediction market income is pending IRS guidance. This page presents our best current understanding of the OBBBA's impact — consult a CPA familiar with derivatives and gambling income before filing.
How Much Phantom Income Do You Owe?
These worked examples show how the OBBBA math plays out across common trading scenarios. All figures are illustrative.
Scenario A — Break Even
The question: "$500 wins vs $500 losses"
Total wins: $500
Total losses: −$500
Possible outcomes
$450 on Schedule A.
Undeductible gap: $50. Only applies if you itemize deductions (Schedule A).
Scenario B — Net Loser
The question: "$2,000 wins vs $3,000 losses"
Total wins: $2,000
Total losses: −$3,000
Possible outcomes
$1,800 on Schedule A.
Undeductible gap: $1,200. Only applies if you itemize deductions (Schedule A).
Scenario C — High Volume Break Even
The question: "$10,000 wins vs $10,000 losses"
Total wins: $10,000
Total losses: −$10,000
Possible outcomes
$9,000 on Schedule A.
Undeductible gap: $1,000. Only applies if you itemize deductions (Schedule A).
Which Platforms Are Affected?
| Platform | Likely Tax Classification | 1099 Expected? |
|---|---|---|
| Kalshi | Possibly Section 1256 derivative⚠ Unverified — pending review | $600+ threshold (unconfirmed) |
| Polymarket | Likely gambling income (USDC settlement)⚠ Unverified — pending review | Self-report only |
| Robinhood | Likely gambling income (Kalshi-routed)⚠ Unverified — pending review | TBD |
| FanDuel Predicts | Likely gambling income (CME-routed)⚠ Unverified — pending review | TBD |
| DraftKings | Likely gambling income (CME-routed)⚠ Unverified — pending review | TBD |
🏛️ Kalshi Section 1256 Exception
Kalshi contracts may qualify as Section 1256 derivatives (60/40 capital gains treatment). If so, the OBBBA gambling loss cap may not apply — Section 1256 has its own favorable loss netting rules. The IRS has not issued formal guidance on this classification. Consult a CPA before filing.
What You Should Do Now
This trap affects your 2026 activity (returns due April 2027 — not this year's filing). But the time to prepare is now.
Export your complete trade history
Download your full transaction history from each platform you used. Don't rely on net P&L figures — you need gross wins and gross losses tracked separately.
Calculate total wins and total losses separately
The OBBBA formula uses gross wins and gross losses — NOT net P&L. A trader who won $5,000 across 50 trades and lost $4,800 across 60 trades is in a very different position than someone with a flat $200 net gain.
Determine if you itemize deductions
If you take the standard deduction, gambling losses are irrelevant — you cannot deduct them at all on your federal return. The phantom income scenario only affects itemizers on Schedule A.
Consult a CPA familiar with derivatives
Especially if you trade on Kalshi. The Section 1256 question is unresolved — a generalist CPA may not know how it interacts with the OBBBA. Find someone who has done derivatives or commodity trading returns.
This applies to 2026 — due April 2027
If you're filing your 2025 taxes right now, the OBBBA 90% cap does NOT apply. The old rules still govern 2025 activity. Mark your calendar for 2027.
✅ Filing 2025 taxes right now? You're safe.
The OBBBA 90% cap takes effect January 1, 2026. If you're preparing your 2025 return (due April 2026), the old rules apply: gambling losses are deductible up to 100% of gambling winnings on Schedule A. No phantom income trap this cycle.