Taxation of Polymarket – The Ticking Time Bomb of Prediction Markets and the Tax Trap for Crypto Investors

How Does the Israel Tax Authority Actually Examine Profits from Polymarket?

The real drama begins in investigation rooms and tax assessment proceedings. Israeli legislation has not yet caught up with the pace of innovation in smart contracts and decentralized markets. This leaves tax assessing officers with the traditional tools of the Income Tax Ordinance [New Version]. When they look at your profits from Polymarket, they try to solve a puzzle: are you a sophisticated trader, or simply someone who put money on a virtual roulette wheel? The tax assessing officer will examine the frequency of your transactions, the scope of the funds invested, how long you held the position, and, above all, your level of knowledge and expertise in the field you predicted. An investor who can prove that their activity is based on economic models, data analysis, or risk hedging may be able to persuade the authority to classify the profit as capital income or business income. By contrast, someone who acted on impulse and without any prior knowledge may often find themselves subject to a much harsher and more rigid classification.

Key Risks

Tax on the Gross Amount Without Mercy

This is perhaps the most frightening scenario for any user of prediction markets. If the Israel Tax Authority determines that your activity is in fact gambling under Section 2A of the Ordinance, you are exposed to a 35% tax. But the real tragedy is not in the tax rate. It is in the calculation base. Tax on gambling is imposed on the gross winning amount. This means that the Israel Tax Authority may completely disregard the losses you accumulated in other predictions on the same platform and may sometimes even refuse to recognize the original cost of your investment in the specific contract. You may find yourself paying the state an amount of tax that exceeds the economic profit left in your pocket, while the exemptions commonly available for lotteries in Israel do not apply at all to foreign platforms.

The Double Tax Trap When Using Digital Currencies

The complex subplot of Polymarket lies in the currencies through which you operate, usually stablecoins such as USDC (a “stable” crypto currency whose value is pegged one-to-one to the U.S. dollar). According to the Israel Tax Authority’s position, a digital currency is an asset. The immediate meaning is that the very act of purchasing the prediction or contract using crypto constitutes a tax event of “selling” the digital asset. Even if your prediction ultimately turned out to be wrong and you lost all your money on Polymarket, you may still have created a capital gains tax event at the moment you used the currency, if its value had increased since you purchased it. This is a transparent tax event that happens behind the scenes, but the reporting obligation applies immediately.

Criminal Exposure and Statements of Assets

Many investors are unaware that merely holding capital on foreign platforms or in decentralized wallets requires careful reporting in cases involving a request for a statement of assets or annual reports. In an era in which tax authorities use top-tier cyber and intelligence tools to analyze blockchain networks, any attempt to hide or ignore these holdings may lead to in-depth investigations, significant fines, and exposure to criminal proceedings for tax evasion, even if this was done entirely in good faith.

How to Withdraw Crypto Funds to the Bank

The moment you try to transfer the profits from the virtual world into your Israeli bank account is the moment the conflict reaches boiling point. Banks in Israel, which are subject to strict anti-money laundering regulation, view any transfer originating from crypto as a clear red flag. If you arrive without proper advance preparation, the bank may simply refuse to accept the money and close the door. To overcome this hurdle, careful preparatory work is required. You must keep continuous and complete documentation of the “money trail” – from the first ₪ converted into crypto, through wallet addresses, all trading and prediction transactions carried out, and up to the return of the funds. Approaching the Israel Tax Authority in advance in order to settle the classification and obtain an orderly tax approval is the only way to ensure that your money lands safely in your current account.

Illustrative Example Only

To understand the magnitude of the risk, consider the scenario of an investor who purchased crypto currencies in the amount of ₪20,000

A few months later, their value increased to ₪50,000. The investor decides to use the full ₪50,000 to participate in predicting the election results on Polymarket. The very act of carrying out the transaction constitutes a deemed realization of the crypto and creates a capital tax liability of 25 percent on the gain that arose (tax of ₪7,500). Now, the investor’s prediction came true and they collected ₪100,000. If the tax assessing officer classifies this activity as gambling, the investor will be required to pay tax of 35 percent on the full winning amount (₪35,000). As a result, due to poor planning and a lack of understanding of the system, the investor pays a substantial amount of tax, without the ability to efficiently offset fees, failed transactions, or the original cost.

*It should be emphasized that this is an illustrative example only and that each case is examined on its own merits.

Based on our professional experience, we have seen cases in which quick and strategic action completely changed the picture. Not long ago, a client came to us – an experienced capital markets participant who had discovered the world of prediction markets and began carrying out dozens of transactions in parallel with crypto trading. He approached our firm after the bank refused to deposit a significant amount he had earned, and he was convinced that the tax assessing officer would classify all of the activity as gambling and wipe out his entire bottom line. We entered a race against time. We conducted an in-depth analysis of his transaction history, collected data files from the blockchain, and showed that a substantial portion of the transactions were intended to hedge other positions he held in the traditional capital market, using clear analytical expertise. The structured legal and factual argument we submitted prevented the activity from being classified as gambling and allowed the client to pay capital gains tax only on the true profit he had generated, and to release his funds through the bank smoothly and lawfully.

Do Not Wait for a Knock on the Door from the Israel Tax Authority

Markets such as Polymarket create fascinating opportunities, but they also expose users to legal gray areas filled with risks. The assumption that your money is protected in a decentralized wallet is an illusion that may cost you dearly. The transparency of the blockchain and the increasing sophistication of tax authorities require you to stay one step ahead – document everything, understand your tax exposure in advance, and avoid making random transactions without advice.

Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team consists of professionals with years of experience at the Israel Tax Authority, alongside experience in leading firms and law firms, bringing together a legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, as well as clients seeking focused advice in clear and accessible language. We also work with a professional network of accounting firms and law firms around the world, in order to provide a complete framework in cross-border cases.

If you have operated on prediction markets, accumulated crypto profits, or are concerned that the bank may refuse to accept your funds, now is the time to act in a planned and informed manner. Contact us today for a discreet consultation, in which we will analyze your precise tax position and together build the safest path to protect your profits and avoid unnecessary tax accidents.