Last April, I sat at my kitchen table staring at a 1099 form from Kalshi and a pile of trades that had gone both ways. I had some winners on Fed rate decisions. I also had a stretch in Q3 where I got stubborn on inflation prints and gave back most of my gains. The question that kept me up: could I actually deduct those losses, or was the IRS going to treat this like some weird gambling income where you only pay on the wins?
Kalshi is CFTC-regulated and based in the US. This matters. Because it operates as a designated contract market, Kalshi issues 1099 forms to traders who meet the IRS reporting thresholds. You will receive a 1099-B if your activity crosses the relevant dollar amounts.
This puts Kalshi in a different category than offshore prediction markets. There's no guessing about whether your trades are reportable. They are. And that paper trail actually helps when you want to claim losses.
A few things to know about Kalshi's reporting:
Yes, but with conditions. If you are trading prediction markets on Kalshi, your losses can generally offset your gains. This is similar to how you would treat losses on stocks or options. You are not in the same bucket as casino gamblers who face much stricter limitations.
The key question is how the IRS classifies Kalshi contracts. There has been some debate about whether event contracts fall under Section 1256 (like regulated futures) or whether they are treated as standard capital assets. Kalshi has stated that their contracts are designed to qualify for Section 1256 treatment, which would give you 60/40 tax treatment (60% long-term, 40% short-term capital gains rates). But I am not your accountant, and the IRS has not issued definitive guidance on every event contract type.
Here is what I do know from my own experience and from talking to other traders in the Telegram channel I run: most CPAs are treating Kalshi trades as capital transactions. Losses offset gains. If you have net losses beyond your gains, you can deduct up to $3,000 against ordinary income per year, with the rest carrying forward.
If Kalshi contracts qualify as Section 1256 contracts, you get some nice benefits:
If they are treated as regular capital assets, you lose the 60/40 split and the carryback provision. Your holding period matters. Most prediction market trades settle quickly, so you would likely have short-term gains and losses anyway.
I have seen traders take both positions. The conservative approach is to treat them as standard capital assets unless your tax professional is confident about Section 1256 treatment. The aggressive approach leans into the 60/40 split. Either way, the losses are still deductible against gains.
Here is how I handle this, and it has worked fine through two tax seasons now:
1. Download your transaction history from Kalshi. Do this before tax season gets busy. You want the full CSV, not just the 1099 summary.
2. Reconcile with your 1099-B. Make sure the numbers match. I have caught small discrepancies before, usually related to timing around year-end.
3. Calculate your net gain or loss. Add up all proceeds, subtract all cost basis. Kalshi makes this relatively easy since each contract has a clear entry and exit.
4. Decide on your reporting position. Are you treating these as Section 1256 or standard capital transactions? Pick one and be consistent.
5. Report on the appropriate form. Section 1256 contracts go on Form 6781. Standard capital gains go on Schedule D with Form 8949.
6. Keep records for at least three years. The IRS can audit, and prediction markets are new enough that I would not be surprised to see more scrutiny eventually.
I have seen people mess this up in a few ways:
I am not a CPA. I had enough background from my CME days to understand the basics of how derivatives are taxed, but I still run everything past a tax professional who has experience with trading accounts.
If you are asking whether Kalshi losses are tax deductible and you have significant volume, find someone who knows derivatives taxation. Not all accountants do. The cost of a good tax professional is usually worth it compared to the risk of doing it wrong.
Prediction markets are still relatively new in the US regulatory framework. The rules may evolve. What I am describing here reflects my understanding as of early 2025, based on how the contracts are structured and how other traders I know are handling it.
Yes, but with limits. If your Kalshi losses exceed your gains, you can deduct up to $3,000 of net capital losses against your ordinary income each year. Any losses beyond that carry forward to future years. This is the same rule that applies to stock losses.
Kalshi issues 1099-B forms to traders who meet IRS reporting thresholds. If your trading activity is above those thresholds, you will receive the form by mail and can also download it from your account. You are responsible for reporting your activity even if you do not receive a form.
No. Kalshi operates as a CFTC-regulated exchange, and its contracts are treated as financial instruments rather than gambling. Gambling losses have stricter deduction rules (you can only deduct them against gambling winnings). Kalshi losses are treated as capital losses, which are more flexible.
This depends on your interpretation and your tax professional's advice. Kalshi has indicated their contracts are designed to qualify for Section 1256 treatment, but the IRS has not issued definitive guidance. The safer approach is standard capital gains treatment. The more aggressive approach uses Section 1256 for the 60/40 benefit. Consult a tax professional.
Not financial advice. I trade my own money and you can lose yours. Do your own research.