How to Fill In Form 6781 If You Take the Section 1256 Position on Event Contracts

If you and your preparer take the Section 1256 position, you list each contract on Form 6781, Part I, line 1, including open contracts valued at year end, net them on lines 2 through 5, then put 40% on line 8 and 60% on line 9. Those amounts flow to Schedule D lines 4 and 11. The hard part is whether it applies: the IRS has never said event contracts are Section 1256 contracts, and many practitioners consider the position aggressive.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed. This article explains the options and the sources behind them; a tax professional can tell you which position fits your situation.

Before you open the form

Form 6781 is a reporting form. It doesn't establish that a contract qualifies. Its own instructions repeat the statute: a Section 1256 contract is a regulated futures contract, foreign currency contract, nonequity option, dealer equity option or dealer securities futures contract, and it doesn't include a commodity swap or "similar agreement". Read Section 1256 and prediction markets for the arguments on both sides first.

Two limits apply before any line is filled in:

• Venue. The argument needs a qualified board or exchange. Hyperliquid and Polymarket's on-chain international exchange are outside it, so those results don't belong here.
• Disclosure. Consider Form 8275, because no 1099-B will back up the entry.

This walkthrough uses the 2025 Form 6781, and its instructions are printed on the form itself. Check for changes when the 2026 version is published.

Part I, line by line

At the top, boxes A, B and C are mixed straddle elections. Leave them blank unless you hold offsetting 1256 and non-1256 positions. Box D is the carryback election, covered below.

Line 1 needs the most care. Traders with a 1099-B enter box 11 and the broker's name. A trader with no 1099-B follows a different rule. The instructions say to "list separately each transaction" for which you didn't receive one. Kalshi's tax documentation page doesn't describe Section 1256 reporting for event contracts, so expect to use your own records. A busy account won't fit on the form's rows, so ask your preparer how to present the list, such as a statement that supports the line 1 total.

Line 4 will usually be empty, as there's no 1099-B to adjust.

Worked example, including a year-end mark

Assume these Kalshi results for 2026:

The form then reads:

The open position is the part traders miss. Under the mark-to-market rule, each contract held at year end is treated as sold at fair market value on the last business day, which is December 31, 2026. No IRS source says how to price a thin event contract on that date, so record your source and method. Last trade, bid or midpoint can differ.

The mark carries into 2027. If that $1,100 position settles at $2,000 next year, your 2027 gain is $900 ($2,000 minus $1,100), not $1,200, because you already reported $300. Publication 550 shows the same pattern with a futures contract. See open positions at December 31 for the comparison with other treatments.

Losses and the carryback election

A net loss flows through lines 8 and 9 and is then subject to the normal capital rules: it offsets capital gains, then up to $3,000 of ordinary income, and the rest carries forward. Box D offers a further option. An individual can elect to carry a net Section 1256 contracts loss back 3 years. The rules in the form's instructions are narrow:

• The loss is the smaller of two figures: the excess of your 1256 losses over your 1256 gains plus $3,000 ($1,500 if married filing separately), or your capital loss carryovers to next year figured as if line 6 were zero.
• It goes to the earliest of the three years first.
• It can absorb only gains that came from Section 1256 contracts in that year, limited to the Schedule D line 16 gain.
• It can't increase or create a net operating loss in that year.
• In each carryback year, it's treated as 60% long-term and 40% short-term.

To use it, check box D, enter the amount on line 6, and file Form 1040-X or Form 1045 for the carryback year, with amended Forms 6781 and Schedule D. On the amended Form 6781, line 1, enter "Net section 1256 contracts loss carried back from" and the year.

If you never reported 1256 gains in those years, this does nothing for you, which is the usual case for someone who only trades prediction markets.

Parts II and III

Part II is for straddles. Skip it if you have no offsetting positions, but read arbitrage and straddle rules if you hold both sides across venues. Part III is a memo list of year-end positions with unrecognized gain, and the instructions say to skip it if you have no recognized loss on any position.

Before you file

Keep every fill, fee and settlement, the source of each year-end price, and your reasoning for treating the contracts as Section 1256 contracts. To size what's at stake first, run the free OddsFile check: paste a Polymarket or Hyperliquid address and see your 2026 P&L under each treatment, no signup. Kalshi results need your account statements, and Polymarket's on-chain results don't go on this form.

FAQ

Does the wash sale rule apply on Form 6781?

The form's instructions say the wash sale rules don't apply to Section 1256 contracts held at year end under the mark-to-market rules. If the contracts aren't really 1256 contracts, that falls away too.

Can I report 1256 for Kalshi and capital for Polymarket's on-chain exchange?

Yes in concept, because only a qualified board or exchange can support Section 1256. The on-chain results would go through another route, such as Form 8949.