Section 1256 vs Schedule D: the unsettled election for event contracts
Three plausible treatments
If event contracts are "regulated futures contracts" or "nonequity options" under Section 1256, gains get the blended 60/40 treatment: 60% long-term, 40% short-term capital gains regardless of holding period, plus mark-to-market accounting and three-year loss carryback. This is usually the most favorable reading for active traders.
If they are treated like other non-1256 derivatives, gains and losses land on Schedule D as ordinary capital gains — short-term or long-term by holding period, with the $3,000 capital-loss limitation against ordinary income. If the IRS instead viewed them as wagering transactions, losses would only be deductible against gambling winnings — the worst outcome for most traders.
Why the answer is not settled
Kalshi event contracts trade on a CFTC-regulated exchange, which is the core of the Section 1256 argument. But Section 1256 was written for traditional futures and listed options, and the IRS has never confirmed that binary event contracts qualify. Tax professionals take both positions; no court or guidance has resolved it.
The practical difference is large. On identical six-figure gains, the 60/40 blend can be worth thousands of dollars compared with pure short-term treatment — and the loss-treatment difference matters even more in a losing year.
What this means in practice
Whichever position you and your tax professional land on, the arithmetic starts from the same place: a complete, trade-level record of every fill and fee, with contracts identified by venue and ticker. Both the Section 1256 computation and the Schedule D computation are mechanical once that record exists — and impossible without it.
Consistency matters. Filing one year under Section 1256 and the next under Schedule D without a change in facts invites questions. Pick a defensible position, document why, and apply it uniformly.
FAQ
Do Kalshi contracts qualify for 60/40 Section 1256 treatment?
Unsettled. The contracts trade on a CFTC-regulated exchange, which supports the Section 1256 reading, but the IRS has issued no guidance confirming it. Tax professionals currently take both positions.
Which treatment is best for me?
For most active traders Section 1256 is the most favorable (blended rates, loss carryback) and gambling treatment the least (losses only deductible against winnings). The right answer depends on your facts — this is the conversation to have with a tax professional.
Can I switch treatments between years?
Switching without a change in facts or law is risky. Consistency is one of the few things that makes an unsettled position defensible.