Section 1256 and Prediction Markets: Does 60/40 Apply to Kalshi Event Contracts?

Section 1256 treatment would tax prediction market gains as 60% long-term and 40% short-term capital gain, no matter how long you held the contract. Some traders on CFTC-regulated exchanges like Kalshi and Polymarket US argue their event contracts qualify. Whether they do is unsettled: the IRS has never addressed it, and many tax practitioners consider claiming Section 1256 for event contracts an aggressive position.

OddsFile is software, not tax advice. The IRS has not issued guidance on how prediction-market contracts are taxed. This article explains the statute and the competing arguments; a tax professional can tell you whether any position fits your situation.

This guide walks through what IRC §1256 actually requires, how event contracts measure up, what the 60/40 split is worth in dollars, and how the mechanics (year-end mark-to-market, Form 6781, loss carryback) would work if the position were taken. For the broader picture, start with are prediction market winnings taxable?

What Section 1256 does

For a "section 1256 contract," the Internal Revenue Code applies three special rules:

1. 60/40 character. Any gain or loss is treated as 60% long-term and 40% short-term capital gain or loss, regardless of holding period (§1256(a)(3)).
2. Mark-to-market. Every contract you hold at the end of the tax year is treated as sold at fair market value on the last business day, and the gain or loss is recognized that year (§1256(a)(1)). The next year's basis is adjusted accordingly.
3. Loss carryback. An individual with a net Section 1256 loss can elect to carry it back three years, against Section 1256 gains only (§1212(c)).

Gains and losses are reported on Form 6781, then flow to Schedule D.

What counts as a Section 1256 contract

Section 1256(b)(1) lists five categories:

Section 1256(b)(2) then excludes certain instruments, including "any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement."

A "qualified board or exchange" includes a domestic board of trade designated as a contract market by the CFTC (§1256(g)(7)). Kalshi is a CFTC Designated Contract Market (DCM), and so is QCX LLC, which operates as Polymarket US. Polymarket's international, on-chain exchange and Hyperliquid are not, so their contracts and perps are outside Section 1256 under any reading.

The argument for Section 1256

Supporters point to:

• The venue. Kalshi and Polymarket US are DCMs, which satisfies the "qualified board or exchange" requirement on its face.
• Futures-like regulation. Kalshi lists event contracts under CFTC rules and clears them through a CFTC-registered clearinghouse.
• The listed-option analogy. A binary event contract pays a fixed amount if a condition is met and nothing otherwise, which economically resembles a cash-settled binary option. If it is an option traded on a qualified board or exchange and not an equity option, the nonequity option category could apply.
• Policy consistency. Similar CFTC-regulated products, such as exchange-traded futures and index options, get 60/40.

The argument against

Critics, including many CPAs who specialize in trader taxation, point to:

• Being a DCM is necessary, not sufficient. A regulated futures contract also requires a margin system in which the amounts deposited and withdrawn depend on daily marking to market. Kalshi and Polymarket US event contracts are fully collateralized: you pay the full price up front and there is no variation margin. That does not fit the §1256(g)(1) definition comfortably.
• The swap exclusion. Event contracts are commonly described as swaps under the Commodity Exchange Act, and the Third Circuit (April 2026, in a New Jersey case) reportedly treated Kalshi's sports contracts as swaps. If they are swaps or "similar agreements," §1256(b)(2) excludes them. Regulatory labels don't control tax classification, but this argument cuts against 1256.
• No authority. There is no revenue ruling, notice, private letter ruling or case applying Section 1256 to event contracts. CPA Robert Green concludes prediction markets "likely do not qualify" (Green Trader Tax).
• No 1099 support. Brokers report Section 1256 contracts in a separate section of Form 1099-B. Kalshi's help center describes no such reporting for event contracts (Kalshi help), so a 1256 position on your return won't match any information return.

What 60/40 is worth: a worked example

Assume a single filer in 2026 with a 32% ordinary rate and a 15% long-term rate, and $50,000 of net event-contract gains, all from positions held less than a year.

The blended 1256 rate here is 21.8%, saving $5,100 versus short-term treatment. At the 37% top bracket with a 20% long-term rate, the blend is 26.8%, about 10 points lower than ordinary rates. The 3.8% net investment income tax can apply to all of these and is ignored here. These are estimates, not a return.

The benefit is real, which is exactly why the position draws scrutiny.

Year-end mark-to-market: the part people forget

If you take the 1256 position, it applies to open contracts too. Suppose on December 31, 2026 you hold 10,000 "Yes" contracts on a 2027 event, bought at $0.40 ($4,000), now trading at $0.65:

• Deemed sale on December 31: 10,000 × $0.65 = $6,500
• 2026 gain: $6,500 − $4,000 = $2,500, taxed 60/40 in 2026
• New basis going into 2027: $6,500

If the contract later resolves "No" and pays $0, your 2027 loss is $6,500, not $4,000. Across both years the net is the same ($2,500 − $6,500 = −$4,000), but the timing moves. You can't take the 60/40 rate on closed trades and skip marking open ones.

Losses under Section 1256

Net Section 1256 losses are capital losses split 60/40. They offset other capital gains, then up to $3,000 of ordinary income per year (§1211(b)). The rest carries forward.

The extra feature is the carryback election under §1212(c): you can carry a net 1256 loss back up to three years, but only against net Section 1256 gains in those years (for example, futures gains reported on prior Forms 6781). Most prediction-market traders who never had 1256 gains get no benefit from it.

How it would be reported

If you and your preparer take the position:

1. Report the net gain or loss on Form 6781, Part I, line 1, identifying the account or contracts. There's no 1099-B section 1256 figure to transfer, so the number comes from your own records.
2. Apply the 60/40 split on Form 6781, lines 8 and 9, which flows to Schedule D.
3. Check box D on Form 6781 if electing a loss carryback.
4. Many preparers consider Form 8275, a disclosure statement, for a position without direct authority. Adequate disclosure can reduce exposure to some accuracy-related penalties if the IRS disagrees. Whether to disclose is a professional judgment.

Keep complete records: every fill, fee, settlement and year-end price for open positions. See Form 8949 for prediction markets for how the capital-asset alternative is reported instead.

Section 1256 compared with the alternatives

For the full side-by-side with scenarios, see gambling vs capital gains for event contracts. For the gambling limit, see the 2026 gambling loss 90% rule.

Which venues could even be in scope?

OddsFile computes the 60/40 estimate alongside the other treatments so you and your preparer can see what's at stake before deciding. Run the free OddsFile check on a public wallet, or import Kalshi with a read-only key in the app.

FAQ

Are Kalshi contracts Section 1256 contracts?

Not established. Kalshi is a CFTC Designated Contract Market, which meets one requirement, but event contracts are fully collateralized without a variation-margin system and may be swaps excluded by §1256(b)(2). The IRS hasn't ruled, and many practitioners consider the position aggressive.

Does Kalshi report Section 1256 gains on a 1099-B?

Kalshi's help center lists 1099-INT, 1099-MISC, 1099-B for crypto transfers and 1099-DA, plus an annual P&L statement. It describes no Section 1256 reporting for event contracts. Check your own documents for the tax year.

Can Polymarket trades get 60/40 treatment?

Trades on Polymarket's international on-chain exchange can't, because it is not a qualified board or exchange. Polymarket US is a DCM, so the same contested arguments as Kalshi apply there.

Do I have to mark open contracts to market if I use Section 1256?

Yes. Mark-to-market at year end is part of Section 1256, not optional. Open positions on December 31 are treated as sold at fair market value.

Is Hyperliquid perp trading Section 1256?

No. Section 1256 requires a qualified board or exchange, such as a CFTC-designated contract market. Hyperliquid is a decentralized venue.

What happens if I claim 1256 and the IRS disagrees?

The IRS could recharacterize the gains, typically as short-term capital gain or ordinary income, and assess the difference plus interest and possibly penalties. Disclosure on Form 8275 can matter for penalties. A tax professional should evaluate this before filing.