My State Calls Kalshi Gambling. Does That Decide My Federal Tax?

No. A state calling Kalshi gambling doesn’t decide your federal tax. State attorneys general and courts are arguing about who can regulate these contracts. Federal tax turns on federal tax law, and the IRS hasn’t said whether they are wagers. The state’s position can still matter on your state return, and its reasoning could influence the federal argument later.

What decides the federal tax treatment?

The tax code itself. The Supreme Court put the general rule this way in Morgan v. Commissioner(1940), an estate tax case: “State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed.” The Court said federal law prevails “no matter what name is given” to the right by local law.

For gambling, the relevant federal rule is Section 165(d), which limits losses from “wagering transactions” without defining the term. The Tax Law Center, writing in Tax Notes Federal in October 2026, says Congress meant the word’s plain and ordinary meaning, and that:

“Neither the courts nor the IRS has explicitly addressed the question of whether sports event contracts are wagers under federal tax law.”

The same applies in the other direction. The CFTC’s October 2026 proposal to define event contracts as swaps says its classifications are for the Commodity Exchange Act, and that “federal tax treatment” is determined under the Internal Revenue Code. So neither a state’s gambling label nor the CFTC’s swap label settles your federal return.

Who decides what?

Could court rulings still affect your federal tax?

They could, indirectly. These rulings aren’t tax rulings, and they don’t bind your return. But the words a court uses can be cited later in a tax dispute.

The Third Circuit ruled for Kalshi against New Jersey in April 2026. The Ninth Circuit (Nevada, August 2026) and the Sixth Circuit (Ohio and Tennessee, September 2026) ruled for the states, and both said sports contracts are not swaps. All of those rulings came at a preliminary stage.

Courts describing sports contracts as bets would help the argument that they are wagers under Section 165(d). The Tax Law Center already says sports contracts appear to be wagers. The swap label cuts against the 60/40 argument for a different reason, since Section 1256 excludes swaps. No one can tell you yet which argument the IRS will take. See how the Supreme Court case could matter.

Does state law ever matter in federal tax?

Yes, when Congress writes it in. The federal wagering excise tax is 0.25% on wagers authorized under state law and 2% on unauthorized wagers. So for that tax, whether a state authorizes the wager changes the rate. It is a tax on businesses that accept wagers, and it isn’t an income tax on your winnings. How the excise tax could reach prediction markets.

What about your state tax return?

Your state return follows that state’s tax law, and many state returns start from a federal figure, so your federal choice can carry through. Two examples, using the states in the current court fights:

• Utah: the return starts from federal adjusted gross income. There is no gambling loss deduction, but itemized gambling losses can raise a credit based on your federal deductions. Utah details.
• Maryland: gambling losses count only if you itemize, starting from your federal Schedule A. Maryland details.

A few states tax prediction markets specifically. The state-by-state picture.

If it’s illegal in your state, is it still taxable?

Yes. IRS Publication 525 says “Income from illegal activities” must be included in your income, on Schedule 1, line 8z, or Schedule C if it comes from self-employment. So a state winning its case doesn’t erase tax on profit you already made.

What should you do?

• Don’t change your federal method because of a state’s press release or a preemption ruling.
• Do look at gambling treatment as a real possibility for sports contracts, and know what it would cost: you itemize to deduct losses, and from 2026 only 90% of losses count, up to winnings.
• Keep your per-trade records, so you can refigure a year if the law moves.
• Check your state’s own rules separately.

WagerMints shows your trades under all four federal methods, so you can see what the gambling reading would cost you before you choose.

Questions about state gambling labels and federal tax

General information about US tax, not tax advice.