60/40 rule
The tax treatment for Section 1256 contracts: 60 percent of the net gain is taxed at long-term capital-gains rates and 40 percent at short-term rates, regardless of how long the position was held. It usually produces a lower effective rate for active traders.
The rule is powerful for fast traders because a position held for seconds still gets 60 percent of its gain taxed at long-term rates. That can meaningfully lower the effective rate compared with ordinary income treatment, where the entire gain is taxed at your marginal bracket.
The 60/40 rule is the headline benefit of Section 1256 treatment. It splits your net gain into two buckets without regard to holding period: 60 percent is taxed at the long-term capital-gains rate and 40 percent at the short-term (ordinary) rate. A contract you held for nine seconds and one you held for nine months are treated identically. For traders in higher brackets, blending in the lower long-term rate on most of the gain is what produces the savings.
The split is computed on your net for the year, gains minus losses across all your Section 1256 positions, not trade by trade. That net figure is reported on Form 6781, which applies the 60/40 division and carries the result to Schedule D. Because the rule operates on the annual net, a losing stretch genuinely reduces the base that the blend is applied to.
The open question for prediction markets is not how the 60/40 math works, it is whether Kalshi event contracts are Section 1256 contracts in the first place. The rule only helps if the contracts qualify, and that qualification is unsettled. Claiming the 60/40 split on event-contract gains is a judgment call best made with a tax professional, and some preparers pair it with a disclosure.
On a $50,000 net year, the 60/40 rule taxes $30,000 at the long-term rate and $20,000 at your ordinary rate. At 15% long-term and 24% ordinary, that is $4,500 plus $4,800, about $9,300, versus $12,000 if the entire $50,000 were taxed at 24% as ordinary income.
Frequently asked questions
Does the 60/40 rule depend on how long I held the contract?
No. That is the point of it. Regardless of holding period, 60 percent of the net is taxed long-term and 40 percent short-term, which is why active traders benefit even when every position is closed the same day.
Is the 60/40 split applied per trade or on the year?
On your annual net across all Section 1256 positions. Gains and losses are combined first, then the 60/40 division is applied to that net figure on Form 6781.
Do Kalshi contracts definitely get the 60/40 rule?
Not definitely. The rule applies only if the contracts qualify as Section 1256 contracts, which is unsettled for event contracts. Whether to claim it is a position to take with a tax professional.