TAX TREATMENT OF PREDICTION MARKET CONTRACTS
Plain English
Kalshi contracts are CFTC-regulated and treated as Section 1256 contracts — the same tax treatment as futures. This means the favorable 60/40 rule applies: 60% of gains taxed at long-term capital gains rates, 40% at short-term, regardless of how long you held. This significantly reduces the tax burden compared to equity trading.
Going deeper
Tax treatment for CFTC-regulated event contracts (including Kalshi): Section 1256 contracts receive 60/40 tax treatment — 60% of net gains are long-term capital gains (maximum 20% rate); 40% are short-term ordinary income (up to 37%). The blended maximum rate is approximately 26.8%, significantly below the 37% rate for stock day traders. Section 1256 contracts are marked-to-market at year end — open positions are treated as if sold at fair market value on December 31. Wash sale rules do NOT apply to Section 1256 contracts. Net losses can be carried back 3 years to offset prior gains. Kalshi provides year-end tax documents (1099-B equivalent) for reporting. Non-Kalshi, unregulated event markets may have different (less favorable) tax treatment — verify with a tax professional.
Examples
Tax Calculation Example
You make $20,000 net profit on Kalshi in a year. Tax: $12,000 (60%) at 15% long-term rate = $1,800. $8,000 (40%) at 24% ordinary rate = $1,920. Total tax: $3,720 (18.6% effective). Compare: same $20,000 in stock day trading at 24% ordinary rate = $4,800. Section 1256 saves you $1,080 on this example.
Year-End Mark-to-Market
On December 31, you have 500 open contracts worth $0.62 (you bought at $0.45). Unrealized gain = $0.17 × 500 = $85. You are taxed on this $85 as if you sold it on Dec 31, even though you didn't sell. In January, the contracts resolve at $1.00 — you owe additional tax only on the remaining gain ($0.38 × 500 = $190).