You bet on an election outcome via Polymarket, collected USDC when you were right, farmed some yield on the side, and maybe dropped a few hundred on a Solana-based slots protocol because it was 2 AM and you had opinions. Now it’s tax season and you’re wondering if any of this is deductible.
Some of it might be. Most of it is definitely income. And one significant chunk of it is an open legal question that the IRS has not answered clearly enough to bet on — which is a genuinely funny situation given the subject matter.
This post covers the full picture: how crypto gambling winnings are taxed, how losses work (and when they don’t), the unresolved question of whether prediction market positions are gambling or something else entirely, and what good record-keeping actually looks like when your casino is a Solana program with no customer support.
The baseline: gambling winnings are ordinary income, always
Let’s start with what isn’t controversial. Under U.S. tax law, gambling winnings are gross income. Full stop. It doesn’t matter whether you won at a Las Vegas poker table, a licensed offshore sportsbook, or a smart contract on Base that nobody at the IRS has ever heard of. If you received something of value as a result of winning a bet, that value is ordinary income in the year you received it.
For crypto-native gambling, this means:
- Polymarket payout: You bet USDC on an outcome, the market resolves in your favor, and you receive USDC back. The profit — your net payout minus your original stake — is ordinary income at fair market value when received.
- Decentralized casino winnings: You deposited SOL into a provably fair slots protocol on Solana, ran it up, and withdrew more SOL than you put in. The net gain is ordinary income.
- Overtime Markets / SX Bet sports positions: You backed a team, they won, you collected. Ordinary income on the net proceeds.
- Augur resolution: Your position resolved in your favor. The profit is income.
The fair market value (FMV) calculation matters because most of these protocols pay out in crypto, not dollars. You recognize income at the USD value of the tokens at the moment you receive them. If you bet on a World Cup match via SX Bet in USDC, the math is simple. If you bet in some protocol-native token and collect rewards in that same token, you’re converting FMV at the time of payout — and then you’ll have a second taxable event if you later sell or swap those tokens at a different price.
Yes, this means you can owe income tax on winnings you subsequently lose. That’s the magic of crypto gambling taxes, and it does not stop being true just because it’s annoying.
Gambling losses: deductible, but barely
U.S. tax law allows you to deduct gambling losses, but only up to the amount of gambling winnings you report, and only if you itemize deductions on Schedule A. They go under “Other Itemized Deductions” — formerly categorized as a “miscellaneous itemized deduction,” though gambling losses specifically were never subject to the 2% AGI floor that killed most other miscellaneous deductions under the 2017 tax law.
What this means in practice:
- If you won $10,000 and lost $15,000, you can deduct $10,000 in losses — not $15,000. The $5,000 net loss disappears.
- If you won $10,000 and lost $3,000, you deduct $3,000 and pay ordinary income tax on the remaining $7,000.
- If you took the standard deduction, your gambling losses are irrelevant. You can’t use them.
- You cannot carry gambling losses forward to future years.
For most retail crypto gamblers, the practical impact of the loss deduction is limited. The standard deduction for 2025 is $15,000 for single filers ($30,000 married filing jointly). Unless you have significant mortgage interest, state income taxes, or charitable contributions in addition to your gambling losses, you’re probably not clearing the itemization threshold — which means those losses don’t help you at all.
High-volume bettors are the exception. If you ran serious volume through Polymarket or Overtime Markets and have documented losses in the five or six figures, itemizing may make sense. That math is worth running with a professional before you file.
The open question: is Polymarket gambling at all?
Here is where it gets genuinely interesting, and genuinely unresolved.
Polymarket, Augur, and similar platforms operate as prediction markets — you’re not betting on a game, you’re trading binary outcome contracts. The structure looks more like an options market than a casino floor. You buy shares in a “Yes” or “No” position; if you’re right at resolution, your shares pay out at $1.00; if you’re wrong, they go to zero. Between creation and resolution, those shares trade on an open market at prices reflecting the crowd’s probability estimate.
This creates a genuine legal ambiguity. The IRS has not issued specific guidance on whether prediction market contracts are:
- Gambling winnings — ordinary income under Section 61, losses deductible only on Schedule A
- Capital assets — bought and sold like securities, with gains/losses on Schedule D at capital rates (short-term if held under a year)
- Section 1256 contracts — certain regulated futures and options that qualify for 60/40 long-term/short-term treatment regardless of holding period
The Section 1256 argument is aggressive and requires the contracts to meet a specific regulatory definition that most decentralized prediction market contracts almost certainly don’t. The capital asset argument is more interesting — and more viable — particularly for platforms where you’re actively trading positions before resolution rather than just holding to the outcome.
The CFTC designated Polymarket as an illegal facility for U.S. persons in 2022 (hence the geo-block), but CFTC regulatory treatment and IRS tax treatment are not the same thing. A few CPAs have taken the position that prediction market profits should be reported as capital gains. A few others report everything as gambling income. Nobody has a Revenue Ruling to cite.
If you traded prediction markets at significant volume and are wondering whether to report your gains as ordinary income or capital gains, that’s a conversation worth having with a tax professional before the return goes out — not after. This isn’t tax advice; it’s a heads-up that the treatment is contested and your choice of position should be deliberate and documented.
Record-keeping: why your CSV export isn’t enough
Let’s talk about the part that actually defeats most people who try to DIY this.
Traditional sportsbooks and casinos file W-2G forms for large winnings. Polymarket doesn’t file anything. Augur doesn’t file anything. The Solana casino protocol you used at 2 AM certainly isn’t filing anything. The IRS expects you to report this income anyway.
What you need, per bet or per market:
- Date and time of the transaction
- The nature of the wager (what did you bet on, what outcome)
- Amount wagered (in USD at time of transaction)
- Amount received (in USD at FMV at time of receipt)
- Net gain or loss per position
- The on-chain transaction hash (your audit trail if the IRS ever asks)
For prediction markets, the chain of events typically looks like:
- You deposit USDC into the protocol (not a taxable event)
- You buy outcome shares (the purchase itself is generally not taxable at this stage)
- Shares resolve: you receive USDC payout or shares go to zero
- You withdraw USDC (not a taxable event, but the withdrawal confirms receipt)
The taxable event is at resolution/settlement — when the market closes and you receive (or lose) funds. That’s when you recognize ordinary income or a loss.
The problem with standard exchange-style CSV exports is that most aggregator tools were built for buy/sell/swap events. They don’t understand market resolution events, LP-style share mechanics, or the difference between a “bet placed” and a “position settled” transaction. You will get bad data if you run a Polymarket wallet through a generic crypto tax tool and expect it to handle prediction markets correctly.
What BCTP does for clients with prediction market volume
For clients who ran meaningful volume through Polymarket, Augur, Overtime, SX Bet, or decentralized casino protocols, we pull raw on-chain transaction data and process it through our multi-chain transaction processor — which is built to handle settlement events, not just swaps.
For each prediction market wallet, we:
- Identify and separate deposit, purchase, settlement, and withdrawal events
- Calculate net gain/loss per resolved market
- Determine USD FMV at settlement using block-timestamp price data
- Flag the “gambling vs. capital” question where the volume or position structure makes it relevant
- Produce a per-event gain/loss schedule that maps cleanly to Schedule A (gambling deductions) or Schedule D (if you’re taking the capital treatment position)
Decentralized casino transactions — Rollbit on Solana, various Base-native protocols — are treated similarly, though the bet/resolve cycle is typically within a single block or session, which makes the records slightly cleaner.
FAQ
Does Polymarket report to the IRS?
No. Polymarket is geo-blocked for U.S. persons and does not issue 1099s or W-2Gs. That does not mean U.S. persons are exempt from reporting — it means there’s no information return cross-checking you. Self-reporting is still required.
Can I deduct my Augur losses?
If you’re reporting your Augur activity as gambling, losses are deductible on Schedule A up to your Augur (and total gambling) winnings, but only if you itemize. If you’re taking the capital asset position, losses would go on Schedule D as capital losses, which are more usable — but that position needs to be defensible and applied consistently.
I only bet small amounts on Polymarket. Do I still have to report?
Yes. There’s no de minimis exception for gambling income under U.S. tax law. If you made $200 in net winnings, you report $200 in income. The IRS is not going to audit you over $200, but the reporting obligation exists regardless.
What about decentralized sports betting on Overtime Markets or SX Bet?
Same treatment as any other gambling income: net winnings are ordinary income, reported on Schedule 1 of Form 1040. Losses are deductible on Schedule A if you itemize. Because these platforms run on-chain with no reporting obligations to the IRS, the record-keeping burden falls entirely on you.
I used a decentralized casino protocol on Solana that no longer exists. What do I do?
The blockchain doesn’t disappear when the protocol does. Your transactions are still on-chain. Solana explorers (Solscan, Solana Explorer) retain the full transaction history. Pull your wallet history, export the raw data, and reconstruct the record from on-chain events. This is tedious — we do it regularly for clients.
What if I received a protocol’s governance token as a payout?
That token has a FMV at the time you received it. That FMV is ordinary income. If the token subsequently crashed to zero before you could sell it, you have a capital loss when you dispose of it — which does not offset the ordinary income you already recognized. This is the crypto gambling version of a bad beat.
The bottom line
Crypto gambling income is taxable in the year you receive it, at ordinary income rates, at FMV at the time of receipt. Losses are deductible only on Schedule A, only against winnings, and only if you itemize. Whether prediction market contracts qualify for capital treatment is a legitimate open question that you should answer deliberately and document well.
The record-keeping is the hardest part. These protocols were not designed with your Form 1040 in mind, and generic crypto tax tools will not handle settlement mechanics correctly.
If you ran volume through Polymarket, Augur, Overtime, SX Bet, or any Solana/Base decentralized casino in 2024 or 2025, get in touch before you file. The income is real whether you tracked it or not — better to know the number than to guess.
This post is general educational information, not tax advice. Your specific situation may differ. Consult a qualified tax professional before making filing decisions.
Need help with your crypto taxes? Mike Ring and the BCTP team handle the messy stuff — multi-chain DeFi, 1099-DAs that don’t add up, prior-year amendments. Free consult at cryptotaxprep.io or call 410-320-7348.
This isn’t tax advice. Talk to a professional about your specific situation.
