How do prediction markets work? Contracts, prices and payouts explained

What is a prediction market?

A prediction market is an exchange where people trade event contracts: contracts on whether something will happen. The CFTC, the federal regulator for these markets, says event contracts are often based on yes-no scenarios with only two possible outcomes, and that they have a fixed payout, usually $1, and an expiration. Its guide to prediction markets adds that a contract's price reflects traders' perceived probability of the outcome.

In the US, the two best-known prediction markets are Kalshi and Polymarket US. Both are exchanges designated by the CFTC. Kalshi has been one since 2020, and Polymarket US, run by QCX LLC, since July 9, 2025. The markets each one lists change often and can differ by state. Kalshi vs Polymarket compares the two apps side by side.

How do prediction market prices work?

A prediction market price is both what a contract costs and the market's estimate of the chance it pays. Kalshi's election trading guide says a Yes contract priced at 40 cents corresponds to roughly a 40% market-implied chance of Yes. Polymarket US's market data page says the price represents the market's collective belief about how likely an outcome is, with 25 cents meaning roughly a 25% chance.

The price is a crowd estimate, not a fact. It moves when news arrives and when traders buy or sell, and in a market with few traders a single large order can move it a lot. A 70-cent contract can still lose.

Yes and No are two sides of the same contract. Kalshi's help center says the combined value of all Yes and No contracts for a market always equals $1, so if Yes trades at 40 cents, No sits near 60 cents. To compare a price with sportsbook odds, the odds converter turns 40 cents into +150 American odds.

Who is on the other side of a prediction market trade?

Another trader is. Kalshi says that on Kalshi you are always trading against another member of the platform, not the exchange itself. Polymarket US says it runs a central limit order book and that its prices come from traders placing buy and sell orders against each other. The CFTC says regulated exchanges and brokers do not take a side of the trade.

Many markets also have market makers: firms or traders who post buy and sell orders on both sides so others can get in and out. Kalshi says market makers make money by collecting the spread, the gap between the best buy and sell prices, and generally have no view on where the price should go. That is the main difference from a sportsbook, which sets its own odds and takes the other side of your bet.

How do you make or lose money on a prediction market?

You make money when you buy below what the contract is later worth, at settlement or when you sell. Here is one trade, before any change in price. You buy 10 Yes contracts at 40 cents on Kalshi. They cost $4.00, plus a taker fee of about $0.17 from Kalshi's fee formula, so about $4.17 in total.

Kalshi's election guide makes the point that a $1 payout is not a $1 profit, because you paid for the contract and a fee. The same logic applies on Polymarket US, where the taker fee on this trade also rounds to $0.17.

• If the answer is Yes: the 10 contracts pay $10.00, for a profit of about $5.83 after cost and fee.
• If the answer is No: the contracts pay $0, and you lose about $4.17.
• If you sell first: you get what other traders pay at that moment, minus a fee. Selling 10 contracts at 55 cents brings in $5.50 before the fee.

Can you sell a prediction market contract before it settles?

Yes, while the market is open and someone will buy. Kalshi's help center describes a quick order sale that sells contracts at the current market price, and Polymarket US says that when you sell early, the proceeds go to your cash balance right away.

Selling is how traders keep part of a gain or cut a loss before the result is known. It depends on there being buyers. In a quiet market, the best price on offer may be far from what you hoped, and close to the result prices can jump.

How do prediction markets decide the outcome?

Every market has written rules that name the question, the deadline and the official source that decides it. Kalshi's market FAQs say a market settles when the official outcome is confirmed and its markets team finalizes the result, most markets settle within a few hours, often about 3, and the displayed close time may not equal the determination time. Kalshi tells traders to always check each market's official source and determination criteria.

Polymarket US says the exchange determines the result using publicly verifiable information and the sources listed in the rules, that winning contracts settle at $1.00 and losing ones at $0.00, and that all resolutions are final under its rulebook. The rules decide the result, not the market's title. How does Polymarket work? covers Polymarket US settlement and disputes in more detail.

What fees do prediction markets charge?

Most of the cost is a trading fee charged when your order fills, and it is largest on contracts priced near 50 cents. On 100 contracts at 50 cents:

Deposits, withdrawals and special series have their own rules. The CFTC notes that taxes and fees may affect a trader's return.

• Kalshi: 0.07 × contracts × price × (1 − price), times a multiplier set for each series, which is $1.75 at the standard rate. The Kalshi fees guide and Kalshi fee calculator cover the full schedule.
• Polymarket US: 0.0695 × contracts × price × (1 − price) for takers, rounded to the nearest cent, which is $1.74. The Polymarket fees guide covers maker rebates and other cases.

Are prediction markets legal in the US?

Prediction markets on CFTC-designated exchanges are federally regulated, but their status in each state is disputed. The CFTC's position is that prediction markets are federally regulated and under federal law can operate in all 50 states. Several states say sports contracts are unlicensed gambling and have gone to court, and courts have reached different answers.

The dispute is active. On October 27, 2026, the CFTC sued Utah to block state enforcement against CFTC-registered markets and said it has started legal proceedings against nine other states. The CFTC asked for public comment on prediction markets in an advance notice on March 12, 2026, and on June 10, 2026 proposed a contract-by-contract review of event contracts that involve activities such as gaming. We found no final rule as of October 29, 2026.

Kalshi requires users to be 18 or older; Polymarket US requires 18 and the age of majority in your state. What each app offers can differ by state and change quickly. Is Kalshi legit? tracks the state cases. This is general information, not legal advice; check what the app allows where you live.

Are prediction market winnings taxed?

We found no IRS guidance written specifically for event contracts, so ask a tax professional how to report gains and losses. Kalshi's help center says it issues tax forms to users who reach IRS reporting thresholds: a 1099-INT for interest, a 1099-MISC for credits and rewards from Kalshi, a 1099-B for crypto transfers, and a 1099-DA for digital asset reporting from ZeroHash. Not getting a form does not by itself mean nothing is owed.

How do prediction market signup credits work?

Signup credits are trading credit, not cash. As of October 29, 2026, Polymarket US's deposit incentive, running from October 16, 2026, gives a $25 credit for a first deposit of at least $10 within the 7-day window in its terms, one per person, and says incentives may not be withdrawn as cash. Kalshi runs a referral program with its own terms.

Terms change often, so read the current ones in the app. doddo's prediction markets pages list the Kalshi and Polymarket US signup credits next to their deposit, withdrawal and expiry rules, with estimates labeled. doddo does not trade or hold money, and new accounts are on a waitlist for now. The best prediction market apps compares credit rules across more apps.

What are the risks of prediction markets?

Prediction markets carry real risk of loss. The common ones:

• You can lose everything you paid for a contract, plus fees.
• Thin markets: few buyers and sellers can mean poor prices or no way out before settlement.
• Rule wording: a market can settle differently from what its title suggests if you skip the rules.
• Fast prices: news and data releases can move a price sharply in seconds.
• State changes: court orders can remove markets in your state.
• Credits: signup credit usually cannot be withdrawn, so it is worth less than its face value.