The single biggest tax variable for a Kalshi trader is not your rate, it is how your activity is classified. The same trades can be taxed three very different ways, and the gap between the best and worst can be larger than your whole tax bill under the best one.
Enter your gross winning trades and gross losing trades separately, not just your net, because that split is exactly what makes gambling treatment so punishing. Then see Section 1256, ordinary income, and gambling side by side.
Itemize deductions? (needed to deduct gambling losses at all)
Net profit
$10,000.00
what you kept
Section 1256 (60/40)
$1,860.00
19% of net
Ordinary income
$2,400.00
24% of net
Gambling
$2,760.00
28% of net
The gambling trap: under gambling treatment you are taxed on $11,500.00 of winnings, which is $1,500.00 more than the $10,000.00 you actually kept, because the 2026 OBBBA cap lets you deduct only 90% of your losses. This is how break-even or even losing traders can still owe tax.
Section 1256 and ordinary treatment both net your losses against your gains, so tax falls on your net profit. Gambling treatment taxes gross winnings and restricts loss deductions, which is almost always the worst outcome for an active trader. The IRS has not issued formal guidance on prediction-market contracts, so which treatment applies depends on the facts. This is a planning estimate, not tax advice, and it excludes state tax.
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Section 1256 (60/40): if event contracts qualify as Section 1256 contracts, 60 percent of the net gain is taxed at long-term capital gains rates and 40 percent at your ordinary rate, regardless of holding period. This is usually the cheapest outcome.
Ordinary income: the net gain is taxed entirely at your marginal rate. Losses still net against gains in full, with no 3,000 dollar capital-loss cap, so a losing year produces a deductible ordinary loss.
Gambling: winnings are taxed in full as gross, and losses are deductible only if you itemize. Starting in 2026 the OBBBA caps the wagering-loss deduction at 90 percent of losses, so even a break-even trader can owe tax on income they never kept.
Why the gross split matters
Under Section 1256 and ordinary treatment, only your net profit is taxed, so 100,000 in wins against 95,000 in losses is taxed as 5,000 of gain. Under gambling treatment that same activity can be taxed on 100,000 of winnings, with only part of the losses deductible, and none if you take the standard deduction.
That is the standard-deduction trap and the 90 percent cap working together. This calculator shows it in dollars by asking for gross wins, gross losses, and whether you itemize.
FAQ
How are Kalshi profits taxed?
It is unsettled. Depending on the facts, prediction-market trades may be treated as Section 1256 contracts (60/40), ordinary income, or gambling. The IRS has not issued formal guidance, so traders take a defensible position based on the contract type and exchange.
Why can gambling treatment tax me on more than I made?
Because gambling winnings are taxed gross while losses are deductible only if you itemize and, from 2026, only up to 90 percent of losses under the OBBBA cap. A break-even year of large wins and matching losses can leave taxable winnings even though your net was zero.
Is Section 1256 always the best option?
For a net winner it is usually the cheapest because of the 60/40 blend, but it is not automatic. Whether event contracts qualify is unsettled, and most states ignore the 60/40 treatment and tax the full gain anyway. Treat this as an estimate and confirm with a professional.
Stop calculating one trade at a time
ContractTax does this across your whole Kalshi history: real P&L, a Sharp Score that rates your edge, and your tax numbers under every treatment.
These tools are for education and estimation only, not financial or tax advice. Fee estimates use Kalshi’s standard formula and may differ from your actual fees.
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