Polymarket Tax Guide 2025: How to Report Your Profits

Polymarket profits are taxable in most jurisdictions, but reporting them correctly is complex. Are prediction market winnings classified as gambling income, capital gains, or ordinary income? How do you track cost basis across hundreds of trades? This comprehensive 2025 tax guide covers IRS requirements, international considerations, tracking methods, and common mistakes that trigger audits.

Are Polymarket Profits Taxable?

Yes, in most countries. In the United States, the IRS treats prediction market profits as taxable income. The exact classification depends on your trading activity and jurisdiction:

• Casual traders: Likely treated as gambling winnings or capital gains
• Frequent traders: May be classified as ordinary income or self-employment income
• Professional traders: Treated as business income subject to self-employment tax

The distinction matters because it affects:

• Tax rates (capital gains vs. ordinary income rates)
• Deductibility of losses
• Whether you owe self-employment tax (15.3%)
• Recordkeeping requirements

How the IRS Views Prediction Markets

As of 2025, the IRS has not issued specific guidance on prediction markets like Polymarket. Based on existing tax law, there are three potential classifications:

Classification 1: Gambling Winnings (Most Common for Casual Users)

If you trade occasionally for entertainment, the IRS may treat Polymarket as gambling:

Classification 2: Capital Gains (Less Common, More Favorable)

Some tax professionals argue prediction market shares are capital assets (like stocks). If the IRS accepts this interpretation:

Risk: The IRS may challenge this interpretation during an audit. Most markets resolve within weeks/months, making long-term capital gains rare.

Classification 3: Self-Employment Income (Professional Traders)

If you trade full-time or as a primary income source, the IRS may classify you as a professional trader:

When this applies: You make 100+ trades/month, trading is your primary activity, you have no other employment, or you hold yourself out as a professional trader.

What You Must Track for Tax Purposes

Regardless of classification, you must maintain detailed records:

Required Information for Each Trade

USDC Transactions That Matter

Track all movements of USDC:

• Deposits to Polymarket: Not taxable, but establishes basis
• Withdrawals from Polymarket: Not taxable, but shows realized gains
• Bridge transactions: Not taxable, but track fees
• Conversions to other crypto: May be taxable event

Calculating Your Tax Liability

Step 1: Determine Total Winnings and Losses

Step 2: Apply the Correct Classification

Step 3: Calculate Tax Owed

Cost Basis Tracking Methods

When you buy and sell the same market multiple times, you must track cost basis accurately.

FIFO (First In, First Out)

Default IRS method. First shares purchased are first sold.

Specific Identification

You choose which shares to sell (requires contemporaneous documentation).

Advantage: Can minimize gains by selling highest-cost shares first. Requires explicit recordkeeping at time of sale.

Common Tax Mistakes to Avoid

Mistake #1: Not Reporting at All

"It's crypto, they can't track it" is dangerously wrong. Polymarket trades are on-chain and public. When you withdraw to a centralized exchange, that exchange reports to the IRS (Form 1099-B starting in 2025 for many platforms).

Mistake #2: Only Reporting Net Profit

If classified as gambling, you must report gross winnings as income, not just net. Reporting only net ($9,000) when you should report gross ($15,000) will trigger IRS notices.

Mistake #3: Deducting Losses Without Itemizing

For gambling income, losses are only deductible if you itemize deductions. If you take the standard deduction ($13,850 single / $27,700 married in 2023), you cannot deduct gambling losses.

Mistake #4: Poor Recordkeeping

"I think I made around $5,000" won't pass an audit. You need transaction-level records for every trade. PolyTrack's portfolio tracker automatically logs all trades with timestamps, prices, and P&L.

Mistake #5: Not Paying Estimated Taxes

If you make significant profits during the year, you may owe quarterly estimated taxes. Failure to pay quarterly can result in underpayment penalties.

International Tax Considerations

Canada

Polymarket profits likely treated as capital gains (50% taxable) or business income (100% taxable) depending on frequency and intent. Consult a Canadian tax professional.

United Kingdom

Gambling winnings are generally tax-free in the UK, but HMRC may classify Polymarket as financial speculation (subject to Capital Gains Tax). Exemption: First £12,300 of gains are tax-free (2023-24).

European Union

Tax treatment varies by country:

• Germany: Private trading gains tax-free if <€600/year; professional trading subject to income tax
• France: 30% flat tax on capital gains from crypto/speculation
• Portugal: Crypto gains tax-free for individuals (as of 2024, subject to change)

Australia

Capital Gains Tax (CGT) likely applies. 50% CGT discount if held >12 months (rare for Polymarket). Report on individual tax return.

Tools for Tax Tracking

PolyTrack Portfolio Tracker

Automatically tracks all Polymarket trades, calculates cost basis, and exports tax reports. Features:

• Transaction-level logging with timestamps
• Automatic cost basis calculation (FIFO or specific ID)
• CSV export for tax software
• Year-end tax summary reports
• Multi-wallet support

Crypto Tax Software

General crypto tax platforms may support Polymarket with manual CSV import:

• CoinTracker: Import via CSV, generates Form 8949
• Koinly: Supports custom transactions
• TaxBit: Enterprise-grade, used by exchanges
• CryptoTrader.Tax: Budget-friendly option

Manual Spreadsheet Tracking

If you prefer DIY, create a spreadsheet with columns:

State and Local Taxes

Most U.S. states tax gambling and capital gains as ordinary income. Notable exceptions:

• No state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
• Special rules: Some states have different treatment for gambling vs. investment income

If you live in a state with income tax, expect to pay 3-10% additional state tax on Polymarket profits.

How to Report Polymarket Income (U.S.)

If Treating as Gambling Income

If Treating as Capital Gains

If Treating as Business Income

Deductible Expenses for Traders

If classified as business income (professional trader), you may deduct:

• Software and tools: PolyTrack subscription, tax software, trading bots
• Data feeds: News subscriptions, market data services
• Home office: Portion of rent/utilities if you have dedicated trading space
• Education: Trading courses, books, seminars
• Professional fees: CPA, tax preparer, legal advice
• Transaction fees: Gas fees, bridge fees, exchange fees

Note: Casual traders cannot deduct these expenses. Only professional/business traders qualify.

What to Do if You Didn't Track Trades

If you already traded without tracking:

1. Export blockchain data: Use Polygonscan to view all your wallet transactions
2. Reconstruct trades manually: Match buy and sell transactions
3. Use PolyTrack: Import wallet address to retroactively generate trade history
4. Conservative estimation: If you can't reconstruct perfectly, estimate conservatively (higher income to be safe)
5. Consult a professional: CPA can help reconstruct records from blockchain data

Audit Risk Factors

Actions that increase IRS audit risk:

• Large unexplained deposits: $50K+ appearing in bank from crypto exchanges
• Underreporting: IRS receives 1099s from exchanges showing more than you reported
• Inconsistent reporting: Switching between gambling/capital gains year to year
• Round numbers: Reporting exactly $10,000 or $20,000 (looks estimated)
• High income with minimal tax: $100K income but claiming huge losses

Tax Planning Strategies

Harvest Losses Before Year-End

If you have unrealized losses, close them before December 31 to offset current-year gains. For capital gains treatment, this is especially valuable.

Time Large Gains

If you expect lower income next year, consider waiting to realize large gains until January 1. Taxes owed in April 2027 instead of April 2026 gives you an extra year.

Consider Entity Structure

Professional traders may benefit from forming an LLC or S-Corp. Consult a tax professional—entity formation has complex implications.

Future Regulatory Changes

Prediction market tax treatment is evolving:

• 2025 crypto reporting expansion: More exchanges required to issue 1099-B forms
• DeFi regulations: IRS considering stricter reporting for DeFi platforms like Polymarket
• Prediction market specific rules: CFTC/IRS may issue targeted guidance

Stay informed by following IRS notices and consulting a tax professional annually.

Conclusion: Stay Compliant, Minimize Taxes

Polymarket tax compliance requires:

• Meticulous recordkeeping: Track every trade with date, amount, and P&L
• Proper classification: Determine if gambling, capital gains, or business income
• Accurate reporting: Use correct forms and include all required information
• Quarterly payments: Make estimated tax payments if profits are significant
• Professional help: Consult a CPA for amounts over $10K or complex situations

The cost of non-compliance (penalties, interest, audits) far exceeds the cost of proper tracking and professional advice. Start tracking today with PolyTrack's automated portfolio tracker, and consult a qualified tax professional before filing.

For more Polymarket guides, see getting started, deposits and withdrawals, and tracking smart money.