Polymarket Shares

The Internal Revenue Code has never been kind to gamblers. After passage of the One Big Beautiful Bill (OBBB), the Internal Revenue Code’s treatment of gamblers has become even harsh.  Gamblers can now only take a deduction of 90% of “wagering losses” which means many gamblers may end up paying income tax on gambling winnings even if their losses were greater than their winnings.  Polymarkets, which allow individuals to “trade” on prediction all sorts of positions such as which film will win best picture at the Oscars or when foreign leaders will get captured by the United States government, bring up an interesting question – are Polymarket “shares” considered wagers for tax purposes under  the Internal Revenue Code?

Polymarkets allow individuals to purchase “shares” on various predictions.  Common predictions may include: the outcomes of elections, various outcomes of sporting events, commodity prices, and the number of tweets Elon Musk will make in a day.  For example, if there is a prediction that Elon Musk will make 20 or more tweets today, you can buy a “share” in the prediction Elon Musk makes 20 or more tweets.  You can cash out your shares when the market ends (either at the end of the day or when Musk makes his 20^th tweet) or you can sell your share to someone else (for a profit or perhaps for a loss) before the market ends. 

There are transactions that obviously fall into the Internal Revenue Code’s definition of wagering losses because they have met the traditional notions of what we would consider gambling.  Losses from activities such as poker, blackjack, slot machines, and other casino games would be wagering losses.  Losses from bets on sporting events would also be considered wagering losses.

Outside of casinos, financial institutions and investors have traditionally engaged in transactions that can be thought of as wagers or gambling because these transactions involve profiting off risk.  For example, investors trade on commodity futures, often described as “wagers,” hoping that the price of a commodity will either rise above a certain price or go below a certain price at some future date.  However, losses investors or others who trade on commodity futures and similar investments suffer are generally not considered “wagering losses” for purposes of the Internal Revenue code. 

Polymarkets seem to fall between the two worlds of what is traditionally thought of as “gambling” and what could be considered “trading” or “investment” transactions.  Should the tax code treat someone entering the polymarket as a gambler and subject that person’s gains and/or losses to potentially harsher treatment under the tax code?  Some of the predictions on polymarkets are similar to traditional gambling transactions, such as the outcome of sporting events.  In contrast, some predictions appear similar to commodity futures and other transactions that have traditionally been taxed as investments or contracts.  It is not entirely clear when polymarket transactions should or should not be treated as wagers for tax purposes.  There is not much regulatory guidance from the IRS in the area to help taxpayers determine which polymarket transactions are wagers for tax purposes. 

Taxpayers that engage in polymarket transactions should make sure they keep complete and accurate records of all transactions.  Taxpayers should record the amounts of the transactions, dates of the transactions, and terms of the transactions.  (For example, did you buy a share in the “Dodgers win the 2026 World Series” position or the “Oil hits $75 per barrel by June 1^st “position).  Recording screen shots and other records detailing transactions will be crucial.  If you want your polymarket transactions not to be treated as gambling losses for tax purposes, it would be helpful to the document investment purposes for your shares.  In other words, you want to look, act, and appear more like a Wall Street investor than somebody entering a casino. 

The line between “investor” and “gambler” is admittedly not a clear one, but conducting your activities in a business-like manner could be helpful.  This includes keeping accurate and thorough records, documenting research made behind “investment” decisions, consulting with expert advisers, and obtaining credentials such as degrees and professional certifications.  RJS LAW is a full-service law firm that helps its clients with a wide range of tax planning and tax controversy services.  Please feel free to contact us for a free consultation if you have any questions about the tax treatment of wagers or polymarkets.

Written by Joseph Cole, Esq., LL.M.