Wash sale rule
A rule that disallows a loss deduction when you sell a security at a loss and buy a substantially identical one within 30 days. Section 1256 contracts are generally exempt because they are marked to market.
For an active flipper who re-enters the same market repeatedly, the wash sale rule could in theory defer losses, but two things likely shield Kalshi traders: event contracts may not be securities the rule reaches, and if they are 1256 contracts they are exempt. It is unsettled, so keep clean records either way.
The wash sale rule exists to stop traders from harvesting a paper loss while staying in essentially the same position. If you sell a security at a loss and buy a substantially identical one within the 61-day window (30 days before or after the sale), the loss is disallowed for now and instead added to the cost basis of the replacement. The loss is not gone, it is deferred until you finally exit the position for good.
Two features of prediction-market trading likely keep Kalshi traders outside the rule. First, the rule applies to securities, and binary event contracts may not be securities the rule reaches. Second, if event contracts are treated as Section 1256 contracts, they are exempt from wash sale treatment entirely because they are marked to market at year-end, which already recognizes gains and losses without the need for the rule.
The practical takeaway for a high-frequency flipper who re-enters the same market many times a day is to keep clean, complete records regardless of which theory applies. If the rule somehow did reach your activity, those records are what let a preparer compute the deferral correctly; if it does not, you have lost nothing by documenting it.
Stocks show the mechanic plainly: sell a share at a $200 loss and rebuy it three days later, and the $200 is disallowed and rolled into the new share's basis. The question for Kalshi is whether re-entering the same YES market after a losing exit is even the kind of transaction the rule was written to catch.
Frequently asked questions
Does the wash sale rule apply to Kalshi trading?
Probably not, for two reasons: event contracts may not be securities the rule reaches, and if they are Section 1256 contracts they are exempt. It is unsettled, so keep thorough records in case a preparer needs to address it.
What happens to a loss caught by the wash sale rule?
It is not lost, it is deferred. The disallowed loss is added to the cost basis of the replacement position and recognized when you finally close out without rebuying within the window.
Why are Section 1256 contracts exempt?
Because they are marked to market at year-end, their gains and losses are already recognized annually. That removes the loss-deferral game the wash sale rule was designed to prevent, so the rule does not apply.