Before deploying capital into any trading strategy, the most important question is: is it legal? For prediction market arbitrage between Polymarket and Kalshi, the short answer is yes — with important jurisdiction-specific caveats.
What is prediction market arbitrage?
Cross-platform arbitrage means buying YES on one platform and NO on the other for the same event, at a combined cost below $1.00. The profit is locked in at execution, regardless of how the event resolves. This is a neutral, math-based strategy — no prediction of outcomes, no insider information required.
Kalshi: CFTC-regulated and fully legal for US residents
Kalshi is a CFTC-designated contract market (DCM) — the same regulatory category as CME, CBOE, and other major US derivatives exchanges. Trading on Kalshi is legal for US residents. The CFTC provides oversight of contract listings, settlement, and market integrity.
Arbitrage strategies on Kalshi are not prohibited. The platform explicitly allows programmatic API access for trading. There are no rules against simultaneously holding positions hedged on another platform.
Polymarket: Legal for non-US users, restricted for US residents
Polymarket is a decentralised prediction market built on Polygon. In 2022, Polymarket settled with the CFTC for $1.4M over offering unregistered swaps to US persons. Since then, Polymarket has geo-blocked US IP addresses and requires attestation that users are not US persons.
US residents should not trade on Polymarket. Non-US residents in jurisdictions where prediction markets are legal can trade freely. Check your local regulations.
Is the arbitrage strategy itself legal?
Yes. Arbitrage — simultaneously buying and selling equivalent instruments to capture a price discrepancy — is a foundational and legal market activity. It is how markets become efficient. Institutional arbitrageurs operate across every financial market. There is no law against holding offsetting positions on two different platforms.
What matters is: (1) are you legally allowed to trade on each platform in your jurisdiction, and (2) are you complying with each platform's terms of service? For Kalshi, programmatic API trading is permitted. For Polymarket, US persons are excluded.
Tax treatment
In the US, Kalshi trading profits are taxable. Kalshi issues a 1099 for US users with reportable activity. Gains are generally treated as ordinary income or capital gains depending on your situation. Consult a tax professional for your specific case.
On Polymarket (for eligible non-US users), tax treatment depends on your country of residence. USDC payouts are typically taxable events in most jurisdictions.
What Arbitrage Agent does
Arbitrage Agent is a non-custodial tool — your funds stay on Kalshi and Polymarket at all times. The agent uses each platform's official API. It does not circumvent any platform restrictions or geo-blocks. You are responsible for ensuring you are legally eligible to trade on each platform in your jurisdiction.
Non-US users can use both platforms. US-based users can use Kalshi only — which still allows for single-platform strategies, though cross-platform arbitrage requires both.
Summary
- Kalshi: CFTC-regulated, legal for US residents, API trading permitted
- Polymarket: Legal for non-US users in eligible jurisdictions; restricted for US persons
- Arbitrage strategy: Legal — it's a standard market-neutral trading technique
- Tax: Profits are taxable — keep records and consult a tax professional
This is not legal advice. Regulations vary by jurisdiction and change over time. Always verify the current rules in your country before trading.