Kalshi and prediction markets in New York: taxes and legal status

New York's 2025 state rates run from 4% to 10.9% on income over $25,000,000. New York City residents also pay city tax of 3.078% to 3.876%.

New York City residents pay city income tax of 3.078% to 3.876% (2025 table). Yonkers also has resident and nonresident income taxes. The IT-196 instructions say the larger New York deduction usually reduces both state and city tax.

New York taxes short-term trading gains like other income at regular rates.

New York allows gambling losses only as an itemized deduction, on Form IT-196 line 29, up to the amount of your winnings. You can't net losses against winnings and report the difference.

• New York taxes the full winnings, reported as income on Form IT-201. New York State Lottery prizes are taxable too. Nonresident aliens who filed federal Form 1040NR can't claim the gambling loss deduction.
• You can itemize on your New York return even if you took the standard deduction on your federal return.
• New York State Lottery prizes over $5,000 are subject to state withholding, with city withholding for New York City and Yonkers residents (Publication 140-W, 2009 edition).
• New York's IT-196 instructions (tax year 2025) tie the gambling loss deduction to the federal rules in effect for 2017, so the 90% limit does not apply.

As of October 27, 2026, we found no court order in force that stops trading on Kalshi, Polymarket US, Coinbase or other platforms in New York. The state attorney general has sued Coinbase, Gemini, Kalshi and Polymarket US, and the federal commodities regulator has sued New York to stop it. Several platforms have also sued the attorney general. Cases are running in federal court in Manhattan and the Second Circuit appeals court.

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. New York 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 New York 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.