CFTC-Regulated Kalshi Event Contracts: Section 1256 Tax Treatment

Profits from Kalshi event contracts likely qualify for Section 1256 tax treatment, which splits gains 60% long-term and 40% short-term capital gain regardless of how long you held the position. That split can bring the top federal rate on Kalshi gains down to roughly 26.8%, compared with 37% on ordinary income. The important qualifier: the IRS has not issued definitive guidance confirming that event contracts fall within Section 1256, so this is a reasonable interpretation rather than a settled rule.

Do Kalshi Event Contracts Actually Qualify Under Section 1256

Section 1256 covers five categories of contracts: regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts.¹ Kalshi contracts would most plausibly fit as regulated futures contracts or nonequity options.

A regulated futures contract has to meet two statutory tests. The amount deposited and withdrawn must depend on a system of marking to market, and the contract must be traded on or subject to the rules of a qualified board or exchange.¹ Kalshi clears the second test. KalshiEX LLC has been a CFTC-designated contract market since November 2020, which is a qualified board or exchange for these purposes.²

The first test is where it gets messy. Traditional futures use margin accounts that move daily with prices. Kalshi contracts are binary: they pay a fixed amount or nothing. Whether that structure counts as a “system of marking to market” within the statute’s meaning is genuinely debatable. No IRS revenue ruling, formal pronouncement, or tax court decision has addressed whether prediction market event contracts fall within any Section 1256 category, and the statute has not been amended to include or exclude them. Traders who report under Section 1256 are taking a defensible but untested position. If your gains are significant, talk to a tax professional who works with derivatives before you file.

What the 60/40 Split Saves You

If Section 1256 applies, every gain is treated as 60% long-term and 40% short-term capital gain, no matter how briefly you held the contract.³ Buy at 9:00, sell at 9:05, and 60% of the profit still gets the long-term rate.

The 2026 long-term capital gains rates are 0%, 15%, or 20% depending on income; the top ordinary rate is 37%.⁴ At the highest bracket the math is 60% at 20% plus 40% at 37%, which blends to about 26.8%. On a two-week stock trade, 100% of the same gain would be taxed at ordinary rates. For an active trader in a high bracket, that gap runs into thousands of dollars a year.

The 60/40 rule applies symmetrically to losses. A net Section 1256 loss is treated as 60% long-term and 40% short-term, which means you never track holding periods for individual contracts.

Year-End Mark-to-Market

Section 1256 contracts are marked to market at year end. Every open position you hold on the last business day of December is treated as sold at fair market value that day, with the resulting gain or loss reported on that year’s return even though the trade is still open.¹

That can mean owing tax on money you haven’t received. If a contract has gained value by December 31 but hasn’t settled, the paper gain is still taxable. If the position reverses in January, you cannot amend the prior return. The January loss lands in the new tax year instead. Keep enough cash aside to cover the bill on any large open position carried through year end.

The offsetting benefit is that mark-to-market resets each contract’s cost basis to the December 31 value, so nothing gets counted twice when a position spans the calendar boundary.

The Wash Sale Rule Does Not Apply

Section 1256 contracts are exempt from the wash sale rule that governs stocks and securities.³ You can sell a Kalshi contract at a loss and buy it right back without losing the deduction. The exemption exists because mark-to-market already forces annual recognition, so the wash sale backstop is unnecessary.

Losses and the Three-Year Carryback

Section 1256 losses first offset any Section 1256 gains for the same year. If your net result is still a loss, Section 1212(c) lets individual taxpayers elect to carry that net loss back to the three preceding tax years and apply it against Section 1256 gains reported in those years.⁵ The carryback keeps the 60/40 character: 60% long-term, 40% short-term.

The carryback goes to the earliest eligible year first. Suppose you had $10,000 in Section 1256 gains three years ago and $5,000 two years ago. A $12,000 loss this year would absorb the $10,000 from three years back, then $2,000 from two years back. You file amended returns for the affected years and get refunds of the tax previously paid on those gains. Anything left over rolls forward.

Prediction markets are volatile, and a bad year can follow good ones. This carryback is one of the more valuable features of Section 1256 treatment; ordinary capital loss rules do not offer it.

The 3.8% Net Investment Income Tax

Higher-income traders owe an additional 3.8% on net investment income under Section 1411. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold for your filing status.⁶p>

The 2026 thresholds are $200,000 for single filers and heads of household, $250,000 for married filing jointly, and $125,000 for married filing separately. They are fixed in the statute and do not adjust for inflation. For a top-bracket trader, the NIIT pushes the effective federal rate on Kalshi gains from about 26.8% to about 30.6%, before any state tax.

How to Report Kalshi Trades on Your Return

Kalshi provides profit-and-loss information but has said it does not determine the tax character of event contract trades for you.⁷ You may receive a 1099-INT or 1099-MISC for interest or promotional credits, but classifying event contract gains is on you or your preparer.

If you report under Section 1256, the relevant form is IRS Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.³ Part I is where you enter the net gain or loss from all Section 1256 contracts for the year, closed positions and the year-end mark-to-market adjustment together. The form splits that figure 40/60 for you.

Those amounts flow to Schedule D of Form 1040. The 40% short-term portion goes on line 4; the 60% long-term portion goes on line 11.³ If you are electing a loss carryback, Form 6781 has a specific section for that calculation, and you file amended returns for each prior year affected.

What Happens If You Don’t Report

Trading income is taxable whether or not the platform sends a formal tax document. Failing to pay triggers a failure-to-pay penalty of 0.5% of the unpaid amount per month, up to 25%, with interest on top.⁸ Willful evasion under 26 U.S.C. § 7201 is a felony carrying a maximum $100,000 fine for individuals and up to five years in prison.⁹ Kalshi is a CFTC-regulated exchange, and every transaction is recorded and reported, so assuming trades will not be noticed is not a workable plan.

1
Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
2
Commodity Futures Trading Commission. CFTC Designates KalshiEX LLC as a Contract Market
3
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
4
Internal Revenue Service. Federal Income Tax Rates and Brackets
5
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
6
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
7
Kalshi. What Tax Documentation Does Kalshi Provide
8
Internal Revenue Service. Failure to Pay Penalty
9
Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax