Last April I stared at my 1099 from Kalshi and realized I had no idea how to report $11,000 in net gains from event contracts. My accountant, who had handled my CME futures taxes for years, paused on the phone and said, "These aren't really like anything else." That conversation cost me $400 in extra prep fees and a mild panic attack. If you're trading on Kalshi and haven't thought about Section 1256 treatment yet, this is the article I wish I'd had.
Section 1256 of the Internal Revenue Code gives certain financial instruments favorable tax treatment. The big deal is the 60/40 rule: 60% of your gains get taxed as long-term capital gains, and 40% as short-term, regardless of how long you held the position. For someone in a high tax bracket, this can mean paying around 26.8% instead of 37% on short-term gains.
The contracts that qualify include:
Notice what's not on that list: event contracts. At least not explicitly.
Here's the frustrating answer: it's still not definitively settled. The IRS has not issued specific guidance stating that CFTC-regulated event contracts like those on Kalshi qualify for Section 1256 treatment. And until they do, you're in a gray area.
The argument for Section 1256 treatment goes like this: Kalshi is a CFTC-regulated designated contract market (DCM). The contracts settle in USD. They function similarly to binary options on regulated exchanges, which some practitioners argue should qualify as "regulated futures contracts" under the statute.
The argument against: event contracts are a new asset class. The IRS tends to be conservative about extending favorable treatment to instruments it hasn't explicitly addressed. Binary options historically have had their own messy tax treatment, and event contracts aren't identical to traditional futures.
My accountant's position, which I've adopted out of caution: report Kalshi gains as short-term capital gains unless your tax advisor has a specific, defensible reason to claim 1256 treatment. Is it more expensive? Yes. Does it let me sleep at night? Also yes.
Let's run some rough numbers. Say you made $20,000 trading Kalshi markets in 2025, and you're in the 35% federal bracket.
That's an $1,800 difference on a $20,000 gain. Scale that up and you can see why traders care about this question. But claiming 1256 treatment without clear IRS backing is a risk. If the IRS disagrees, you could face penalties and interest on top of the additional tax.
Kalshi issues a 1099-B to traders who meet reporting thresholds. The form reports proceeds and cost basis, but it doesn't tell you whether the contracts are Section 1256. That's not Kalshi being cagey. It's just not their job to give tax advice, and the IRS hasn't given them clear instructions.
I've seen some traders in the Telegram channel I run claim they're reporting under 1256. Others treat everything as regular short-term gains. A few have gotten letters from their CPAs explicitly advising one way or the other. The diversity of approaches tells you everything about how unclear this is.
Given the uncertainty, here's what I actually do:
The question of whether Kalshi event contracts qualify as Section 1256 contracts in 2026 is really a symptom of a larger problem: tax law hasn't caught up to prediction markets. We have a CFTC-regulated exchange, real liquidity, real price discovery on everything from Fed decisions (KXFEDDECISION) to inflation prints. But the IRS still treats this space like it's some novelty.
I'm skeptical that we'll get clarity soon. The IRS moves slowly, and prediction markets aren't exactly a lobbying priority. Until then, traders are stuck making judgment calls with incomplete information. Sound familiar? It's basically what we do every time we click "buy" on a contract.
Yes. Kalshi is a US-based, CFTC-regulated exchange. If you're a US taxpayer and you make money trading event contracts, that's taxable income. You'll receive a 1099-B if you meet the reporting threshold. Even if you don't receive one, you're still legally obligated to report gains. The question isn't whether you pay taxes, but how those gains are categorized.
Possibly, but it's risky without clear IRS guidance. Some tax professionals argue that CFTC-regulated event contracts should qualify as Section 1256 contracts, which would give you the favorable 60/40 split. Others disagree. If you want to take this position, get written advice from a qualified tax professional who can defend it if challenged.
If the IRS determines you underreported your taxes by claiming Section 1256 treatment when it didn't apply, you could owe the difference plus interest and potential penalties. The severity depends on the amount and whether they view the error as negligent or intentional. Conservative reporting now is cheaper than fixing mistakes later.
Maybe. As prediction markets grow and more traders file returns involving event contracts, the IRS may issue guidance or a revenue ruling. But the agency isn't known for speed. For now, traders need to make educated decisions with their tax advisors and accept some ambiguity. Watch IRS notices and consult your CPA annually.
Not financial advice. I trade my own money and you can lose yours. Do your own research.