Kalshi and prediction markets in Massachusetts: taxes and legal status

Massachusetts taxes most income at 5% for 2026, including long-term capital gains. Short-term capital gains are taxed at 8.5% and collectibles gains at 12% (with a 50% deduction). A 4% surtax applies to income over $1,107,750 for 2026 ($1,083,150 for 2025).

Short-term capital gains are taxed at 8.5% (12% before 2023). Capital losses offset capital gains and up to $2,000 of interest and dividends, but not other ordinary income.

Massachusetts allows a limited deduction for gambling losses. Only losses at a casino licensed under MGL ch. 23K, a racing or simulcasting licensee, or (from 2024) a sports wagering operator licensed under ch. 23N count, and only up to winnings from those sources. Losses at out-of-state casinos, with non-Massachusetts operators, and on the Massachusetts state lottery are not deductible.

• Sports wagering winnings and winnings from casinos, raffles, races and other events of chance, wherever held, and winnings from non-Massachusetts lotteries go on Schedule X, line 3. Massachusetts state lottery winnings go on Form 1, line 8b.
• This is not an itemized deduction. It comes off 5% income on Schedule Y, line 17, and the instructions don't tie it to federal itemizing.
• Massachusetts has its own gambling loss deduction and doesn't adopt IRC 165(d), so the federal 90% limit isn't part of it.

As of October 27, 2026, the Massachusetts attorney general's lawsuit against Kalshi over sports contracts is before the state's Supreme Judicial Court, which is reviewing a lower court's decision against Kalshi. We couldn't confirm from a court record what that decision currently requires of Kalshi. Other platforms have federal suits against the state, and we found no ruling in them.

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. Massachusetts uses its own definitions, so check how it treats the method you choose federally. If you report as gambling, the loss rules above apply. The four methods, compared.

The court cases are about whether Massachusetts 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.