Kalshi and prediction markets in California: taxes and legal status

California's rates for 2025 run from 1% to 12.3%. An extra 1% Behavioral Health Services Tax applies to taxable income over $1 million, so the top rate is 13.3%.

California taxes short-term gains as ordinary income at the same graduated rates. It has no special short-term rate or exclusion.

California allows gambling losses only as an itemized deduction, on Schedule CA line 16, and only up to your gambling winnings. California lottery losses are not deductible. The reduction of itemized deductions for high income does not apply to wagering losses.

• California taxes gambling winnings because it starts from federal adjusted gross income. California lottery winnings are excluded from California income, but lottery winnings from other states are taxable. If you reduce income for California lottery winnings, you must also remove related losses from your itemized deductions.
• You can itemize on your California return even if you took the federal standard deduction. Complete a federal Schedule A, check the box in Schedule CA (540) Part II, and attach both.
• Payers must withhold 7% of California-source nonwage payments to nonresidents, including gambling winnings, when they exceed $1,500 in a calendar year.
• It is unclear whether California follows the federal 90% gambling-loss limit from 2026, because California's own Franchise Tax Board pages give conflicting answers.

As of October 27, 2026, no California state order or lawsuit stops prediction market trading. The state attorney general has not sued a platform, but two California tribes won a Ninth Circuit ruling on September 16, 2026 saying they are likely to succeed in barring Kalshi's sports contracts on tribal land. The case went back to the district judge, and no injunction is in force yet.

States say prediction market sports contracts are bets that their gambling laws cover, while Kalshi and the CFTC say they are swaps, a kind of derivative that only the federal Commodity Exchange Act and the CFTC regulate. The Third Circuit appeals court sided with Kalshi against New Jersey in April 2026, while the Ninth Circuit (Nevada, August 2026) and the Sixth Circuit (Ohio and Tennessee, September 2026) ruled for the states, all at the preliminary stage. The Fourth Circuit (Maryland) heard argument in May 2026 and had not ruled as of October 27. New Jersey's petition to the Supreme Court, Flaherty v. KalshiEX (No. 26-299), is waiting on Kalshi's response due November 9, 2026, and the Court has not yet said whether it will hear the case. On October 9, 2026 the CFTC proposed a rule defining event contracts as swaps.

The IRS hasn’t said how prediction market trades are taxed, so you pick one of four federal methods: capital gains, ordinary income, gambling or Section 1256. California starts from your federal figures, so the method you choose federally generally carries onto your state return. If you report as gambling, the loss rules above apply. The four methods, compared.

The court cases are about whether California can license or stop the platforms. None of them decides how your trades are taxed. Trades you already made, including positions an order made you close, still count in your tax year.