Section 1256 and event contracts: do Kalshi trades get 60/40?
Some traders report Kalshi contracts under Section 1256: 60% long-term, 40% short-term, marked to market on December 31. How it works, Form 6781, and the risks.
Updated October 7, 2026 · By the PolyTax team
The short version
- Section 1256 taxes regulated futures and some options at a blend: 60% of the net gain is long-term and 40% short-term, however long you held.
- Positions open at year end are marked to market, so you’re taxed on unrealized gains and can deduct unrealized losses.
- Kalshi and the Polymarket US app run on CFTC-regulated exchanges, which is why some traders use it. The IRS hasn’t confirmed that event contracts qualify.
- The on-chain Polymarket site isn’t a regulated exchange, so its trades don’t qualify.
What Section 1256 is
Section 1256 of the tax code covers regulated futures contracts, foreign currency contracts, nonequity options and a few other instruments. Three rules set it apart from ordinary capital gains:
- 60/40: the net gain or loss counts as 60% long-term and 40% short-term, whatever the holding period.
- Mark to market: anything you still hold at the end of the year is treated as sold at its fair market value on the last business day, and the next year starts from that value.
- Loss carryback: individuals can elect to carry a net Section 1256 loss back three years, against Section 1256 gains only.
All of it is reported on Form 6781.
Why event contracts might qualify, and why they might not
Kalshi is a designated contract market regulated by the CFTC, and the Polymarket US app runs on one too. The case for Section 1256 is that their contracts trade on a qualified exchange like other regulated derivatives.
The case against: a regulated futures contract is defined partly by a daily mark-to-market margin system, which fully paid event contracts don’t have; Section 1256 excludes swaps and similar agreements, and event contracts may fall on that side of the line; and the IRS has issued no ruling, notice or regulation either way. Kalshi also doesn’t send the 1099-B that brokers issue for Section 1256 contracts. Many tax professionals consider the position aggressive.
How much 60/40 can save
Say you net $10,000 on Kalshi in a year, your ordinary rate is 24% and your long-term rate is 15%.
| Capital gains (all short-term) | Section 1256 | |
|---|---|---|
| Short-term part | $10,000 at 24% | $4,000 at 24% |
| Long-term part | $0 | $6,000 at 15% |
| Federal tax | $2,400 | $1,860 |
The gap grows in higher brackets: at the top rates, the blended Section 1256 rate is 26.8% instead of 37%.
The year-end mark
Under Section 1256, a position you hold at year end counts as sold at that day’s price. Buy 200 YES contracts at 30¢ in November, see them trade at 55¢ on December 31, and you report a $50 gain for that year even though you still hold them. The next year starts from $110, not $60.
So you need a year-end price for everything you held over New Year. It’s also why switching treatments is messy: the year after a Section 1256 year has to start from the marks.
Filling in Form 6781
- Part I, line 1: one line per account, for example “Kalshi”, with a net loss in column (b) or a net gain in column (c). Attach a statement listing the positions.
- Lines 2 to 7: total the columns and combine them into the net gain or loss.
- Line 8: 40% of the net, which goes to Schedule D line 4 as short-term.
- Line 9: 60% of the net, which goes to Schedule D line 11 as long-term.
- To carry a net loss back to earlier years, check box D and follow the form’s instructions.
If you use it, protect yourself
If the IRS later decides event contracts aren’t Section 1256 contracts, your gains would be recomputed under another treatment, with interest and possibly penalties. Talk to a tax professional before filing this way. Some preparers attach a disclosure on Form 8275 to positions like this one, which can reduce penalty risk. For the full picture of the alternatives, see Kalshi taxes.
Common questions
Does Kalshi qualify for Section 1256?
The IRS hasn’t said. Kalshi being a CFTC-regulated exchange is the main argument for it, but event contracts lack the margin system of regulated futures and may count as swaps, which are excluded. Treat it as an unconfirmed position and get professional advice.
Can I use Section 1256 for Polymarket?
Not for the on-chain Polymarket site, which isn’t a CFTC-regulated exchange. The Polymarket US app is, so the same unconfirmed argument as for Kalshi applies there.
What price do I use for the year-end mark?
The contract’s fair market value at the end of the last business day of the year. For Kalshi, the last traded price before midnight on December 31 is the usual choice.
Can I switch between Section 1256 and capital gains?
Pick a treatment you can defend and use it consistently. Switching makes year-end marks and carryovers hard to reconcile and can draw questions.
Sources
- 26 U.S. Code § 1256 (Cornell Law School)
- IRS: About Form 6781
- IRS: About Form 8275 (disclosure statement)
This guide is general information, not tax advice. The IRS hasn't issued guidance on prediction markets, so check your situation with a tax professional before you file.