The Section 1256 60/40 rule, explained
Section 1256 of the tax code gives certain contracts a special, and usually favorable, tax treatment: the 60/40 split. If you trade futures, certain options, or other qualifying instruments, this rule can meaningfully lower your effective rate, regardless of how long you actually hold.
This guide explains what Section 1256 covers, how the 60/40 mechanic works, and why it matters, including the contested question of whether prediction-market event contracts qualify. It is educational, not tax advice.
- Under Section 1256, your net gain or loss is split into two parts no matter your holding period: 60 percent is treated as long-term and 40 percent as short-term.
- The classic categories are regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts.
- Section 1256 contracts are marked to market at year-end, meaning any open positions are treated as if sold on the last trading day for tax purposes.
- This is where it gets interesting for Kalshi traders.
- ContractTax computes your trading result under Section 1256 treatment and shows the 60/40 outcome side by side with ordinary and gambling treatment, so you can see the dollar value of the split for your own numbers before deciding whether to claim it.
What the 60/40 rule does
Under Section 1256, your net gain or loss is split into two parts no matter your holding period: 60 percent is treated as long-term and 40 percent as short-term. The long-term portion is taxed at lower capital-gains rates, the short-term portion at your ordinary rate, which blends to an effective rate below your ordinary bracket.
For a fast trader this is the whole appeal. A position held for thirty seconds still gets 60 percent of its gain taxed at long-term rates, something no ordinary short-term treatment offers.
What qualifies as a Section 1256 contract
The classic categories are regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts. The common thread is that they trade on or are subject to the rules of a qualified board or exchange.
Equities, ordinary stock options, and most everyday securities do not qualify. The treatment is specifically for these defined contract types, which is why the question for any new instrument is always whether it fits one of those buckets.
Mark-to-market and how it is filed
Section 1256 contracts are marked to market at year-end, meaning any open positions are treated as if sold on the last trading day for tax purposes. For traders who close everything before year-end, this rarely changes much.
The result is reported on Form 6781, which applies the 60/40 split and flows the totals to Schedule D. Because some 1256 positions are aggressive, preparers sometimes attach a Form 8275 disclosure.
Do prediction-market contracts qualify?
This is where it gets interesting for Kalshi traders. Kalshi is a CFTC-regulated Designated Contract Market, which is the strongest argument that its event contracts could fall under Section 1256, since exchange regulation is a prerequisite for the discussion.
But it is not settled. The CFTC treats these binary contracts in a way that can resemble a swap, and the code has an exclusion that can keep swaps out of 1256. Reasonable professionals disagree, so claiming 60/40 on event contracts is a judgment call, not a certainty.
Where ContractTax fits
ContractTax computes your trading result under Section 1256 treatment and shows the 60/40 outcome side by side with ordinary and gambling treatment, so you can see the dollar value of the split for your own numbers before deciding whether to claim it.
It produces the figures, not the decision. Whether 1256 applies to your instruments is a question for a tax professional.