Can you deduct your Kalshi losses?
A losing year is not all bad news at tax time, because losses can offset gains, but how much you can actually deduct depends on which treatment applies to your trading. The differences are large.
Here is how losses work under each path. This is educational, not advice.
- If your gains are reported as capital or Section 1256, losses offset gains dollar for dollar, and up to $3,000 of net loss can offset ordinary income each year, with the rest carried forward.
- Gambling treatment is the harshest for losers.
- Whatever the treatment, deducting losses requires being able to document them.
- ContractTax computes your net result and shows how your losses play out under each treatment, including the carryback and the gambling cap, so you can see which path actually serves you in a down year.
Under capital or Section 1256 treatment
If your gains are reported as capital or Section 1256, losses offset gains dollar for dollar, and up to $3,000 of net loss can offset ordinary income each year, with the rest carried forward.
Section 1256 adds a useful twist: net losses can be carried back up to three years against prior Section 1256 gains, potentially generating a refund on an amended return. That flexibility is one of the treatment's real advantages.
Under gambling treatment
Gambling treatment is the harshest for losers. Losses can only offset winnings, never other income, and for tax years beginning after the end of 2025, only 90% of losses are deductible against winnings.
That 90% cap can create 'phantom income': a trader who is roughly break-even on paper can still owe tax, because a slice of the offsetting losses is disallowed. It is a major reason gambling treatment is unattractive for active traders.
Keep the records that back it up
Whatever the treatment, deducting losses requires being able to document them. Maintain a complete history of your trades and settlements so your reported losses are defensible.
Where ContractTax fits
ContractTax computes your net result and shows how your losses play out under each treatment, including the carryback and the gambling cap, so you can see which path actually serves you in a down year.