Ordinary income treatment

The most conservative way to report trading gains: the full net is taxed at your regular marginal rate, with no preferential split. For event contracts it typically lands on Schedule 1.

Ordinary treatment is simple and defensible, which is why many cautious traders and advisors default to it. The trade-off is that it forgoes the lower effective rate that Section 1256 would offer if it applies.

Under ordinary income treatment, your net profit from prediction-market trading is added to your other taxable income and taxed at your marginal bracket, the same rate that applies to wages or freelance income. There is no 60/40 split, no preferential long-term rate, and no special form: the net usually flows onto Schedule 1 as other income, then into your 1040. Because event contracts are not reported to the IRS on a 1099-B, the profit figure is self-reported, which makes clean records essential.

The appeal of ordinary treatment is certainty. The tax status of Kalshi event contracts is genuinely unsettled, and ordinary income is the position the IRS is least likely to challenge because it never claims a benefit you might not be entitled to. If you are audited, there is nothing to defend: you paid the higher of the plausible rates. Many cautious filers and their preparers choose it for exactly that reason, especially in the first year or two of trading while the law remains gray.

The cost is real, though. For an active trader in a high bracket, the gap between ordinary treatment and the Section 1256 blend can be several percentage points of your entire net. On a five-figure year that is often thousands of dollars. The practical question is not which treatment is cheaper, it always is to claim 1256, but whether your facts and your appetite for risk support the more aggressive position. That is a conversation for a tax professional who has seen your full picture.