For traders who lost money
Lost money on prediction markets? It might be a tax refund.
Those who decide to file under Section 1256 can get a refund of up to 37% of their losses. Realize provides the forms and calculations to file multiple ways with confidence and ease.
Single filer, $150,000 taxable income, itemizing, a $34,000 net loss and no other capital gains. Under standard capital or Section 1256 the loss is worth $8,160 at the 24% bracket, $720 a year for 12 years; Section 1256 can reach it sooner against Section 1256 gains reported in the prior three years. Under gambling treatment it only offsets winnings. Federal only. Illustrative. No IRS guidance or court ruling addresses whether event contracts are Section 1256 contracts. Separately, federal appeals courts disagree on whether states can regulate them as gambling.
A $34,000 net loss is worth an estimated $8,160 under standard capital or Section 1256 treatment, and $0 under gambling treatment.
What your loss could be worth.
Enter roughly how much you’re down. We’ll estimate what that loss could be worth under each treatment.
The example assumes:
- Single filer
- $150,000 taxable income
- $34,000 net loss
- No other capital gains
Under standard capital or Section 1256, that loss is worth an estimated $8,160 at the 24% bracket: $720 a year for 12 years. Under gambling treatment, with no winnings to offset, it is worth nothing. Federal only.
Can you deduct Kalshi or Polymarket losses?
We see a prediction market loss reported three common ways, and each uses it differently. As standard capital or Section 1256, up to $3,000 a year can offset other income, and Section 1256 can also carry a loss back three years. As gambling, losses only offset winnings.
Example year: single filer, a $34,000 net loss, no other capital gains.
Three common ways to report prediction market trades on a federal return, side by side.
| Compared on | Standard capital§1221 | Section 1256§1256 | Gambling§165(d) |
|---|---|---|---|
| Treats a contract as | An ordinary capital asset | A regulated futures contract or nonequity option | A wager |
| What the loss can do, example | $3,000 off other income this year, worth $300 – $1,110; the rest carries forward. | The same, or carry back 3 years against earlier Section 1256 gains. | $0. With no winnings to offset, it does not reduce tax. |
| Loss against other income | Up to $3,000 a year, after offsetting gains | Up to $3,000 a year, after offsetting gains | None. Losses only offset winnings. |
| Married filing separately cap | $1,500 a year | $1,500 a year | Does not apply |
| Unused loss | Carries forward, with no end date | Can carry back 3 years against Section 1256 gains, then forward | Not usable later. No carryforward, no carryback. |
| Carryback window | None | 3 years, §1256 gains only | None |
| Wash-sale rule | May apply; unsettled for event contracts | Does not apply | Does not apply |
| Forms we build | Form 8949 (figures for Schedule D) | Form 6781 (figures for Schedule D) | Session log, Schedule 1 winnings, Schedule A losses |
| Read more | Standard capital guide | Section 1256 guide | Gambling guide |
Example: a $34,000 net loss with no other capital gains. A deduction is worth your marginal rate, 10%–37%. A Section 1256 carryback depends on Section 1256 gains reported in the prior three years, and is claimed for the earlier years on Form 1045 or an amended return. Gambling losses count only if you itemize. Federal only. No IRS guidance or court ruling addresses whether event contracts are Section 1256 contracts. Separately, federal appeals courts disagree on whether states can regulate them as gambling. Illustrative, not tax advice.
How far back can a loss reach?
One loss, three common ways to file, one time line. Section 1256 can reach back into earlier years, against gains you reported then.
Reaches back three years, against gains you reported then, and forward.
2026 and forward.
2026 only, against winnings.
A Section 1256 carryback is a refund of tax paid in a winning year, claimed on Form 1045 or an amended return that you or your preparer file. A year you never reported is reached by amending that year, under any treatment. Whether event contracts are Section 1256 contracts is unsettled.
Are prediction markets gambling?
Three answers are on the table at once. Only the last one is due in April.
- The CFTCFederal regulator
The Commodity Futures Trading Commission designated Kalshi a contract market in November 2020 and treats its event contracts as regulated derivatives, not bets.
- Some statesGaming regulators
Nevada, New Jersey, Maryland and others argue that sports contracts are bets that need a gaming license. Federal appeals courts have split on it, and the cases are active as of October 2026.
- The IRSFederal tax authority
No IRS guidance or court ruling addresses whether event contracts are Section 1256 contracts, which is why we see three common treatments in use. The tax code counts “all income from whatever source derived” (§61), so the return is due either way.
Realize builds the forms for all three treatments. Which one you use is your decision, or your preparer’s.
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Start filingOften, yes, but how much depends on which of the three common treatments you report under. Under standard capital and Section 1256, a net loss offsets gains, then up to $3,000 a year of other income, and the rest carries forward. Under gambling treatment it only offsets winnings, so a losing year gets nothing back.
No. With no gains, capital-style treatment takes up to $3,000 a year off your other income ($1,500 if married filing separately) and carries the rest into future years.
Only under Section 1256, whose application to event contracts is unsettled. A net §1256 loss can be carried back up to three years against prior §1256 gains. Realize shows the figures once you enter those gains. The claim is Form 1045 or an amended return that you or your preparer file.
Elect it on Form 6781 for the loss year by checking box D. The loss goes to the earliest of the three prior years first, and only against the net Section 1256 gains reported in each. You then claim the refund for those years on Form 1045, filed within one year after the loss year ends, or on Form 1040-X, generally within three years of the due date of the loss year’s return.
No. Realize builds Form 6781, Form 8949 and the statements behind them, with the figures for Schedule D, and they open for the 2026 filing season. Schedule D, the carryover worksheet and any Form 1045 or amended return are completed and filed by you or your preparer.
If you report under gambling treatment, yes: for tax years beginning after December 31, 2025, only 90% of wagering losses are deductible, and only against winnings.
Realize does not choose for you. It prices your year under all three treatments and builds the forms for each. Which one you file under is a decision for you and your CPA or preparer.
Realize is US federal tax software for traders on Kalshi and Polymarket US. It rebuilds a year from every trade, prices it under standard capital, Section 1256 and gambling treatment side by side, and builds the forms for each, from $59 a year. Estimates are free.
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