Section 1256 contract
A category of contracts (regulated futures, certain options, and others on qualified exchanges) that receive special tax treatment under the Internal Revenue Code, including the 60/40 split. Whether prediction-market event contracts qualify is unsettled.
If event contracts qualify, the upside is real: the 60/40 split and exemption from wash sale rules. The catch is that the CFTC treats these as swap-like, and the code can exclude swaps from 1256, which is why claiming it on Kalshi gains is a judgment call for a tax professional.
Section 1256 of the Internal Revenue Code defines a set of contracts, regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options, and certain dealer securities futures, that receive two notable benefits: the 60/40 rate split and year-end mark-to-market treatment. The category exists because these instruments trade on regulated exchanges and are hard to use for the kind of loss-deferral games the wash sale rule was written to stop.
The argument that Kalshi event contracts could qualify rests on the exchange's status. Kalshi is a CFTC-regulated Designated Contract Market, and its contracts are listed and cleared under federal oversight, which is the same regulatory footing that brings futures into Section 1256. Some traders and preparers find that parallel persuasive.
The counterargument is that the code can exclude swap-like instruments from Section 1256, and the precise classification of binary event contracts has not been resolved by the IRS or the courts. That is the crux of the uncertainty: the mechanism is clear, but eligibility is not. Because the benefit is meaningful and the position is aggressive, this is squarely a question for a qualified tax professional rather than a default to assume.
A regulated futures contract on a commodity is the textbook Section 1256 case: it is marked to market at year-end and its net gain is taxed 60/40. The open question is whether a Kalshi YES/NO contract, cleared on a CFTC-regulated exchange, is close enough to that template to be treated the same way.
Frequently asked questions
What makes something a Section 1256 contract?
The code lists specific types, chiefly regulated futures and non-equity options on qualified exchanges, that get the 60/40 split and mark-to-market treatment. Eligibility turns on the instrument and the exchange, not on how you trade it.
Do Kalshi event contracts count as Section 1256 contracts?
It is unsettled. The case for it is Kalshi's status as a CFTC-regulated exchange; the case against is that swap-like instruments can be excluded. The IRS has not resolved it, so treat the position as a judgment call.
What are the benefits if they qualify?
Two: the 60/40 rate blend, which usually lowers the effective rate for active traders, and exemption from wash sale tracking because the contracts are marked to market at year-end.