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Estimated tax saved
$6,957
§1256 60/40 vs 37% ordinary @ $68,210 Won
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How much more can you keep?
Section 1256 may reduce the tax bill on your profit.
Quick estimate
Estimated federal tax savings
$8,185 to $2,865
Prediction-market contracts usually settle within a year, so a winning year is taxed as short-term (ordinary) gains by default. §1256 reprices 60% of it to the lower long-term rate, and the higher your bracket the more that saves. See how we calculate this and the assumptions. Not tax advice.
The same win, three ways
How your trades are characterized is worth more than how they went.
What each treatment saves you on a $68,210 winning year, measured against standard capital treatment. Assumptions, all stated because they move the answer: a single filer in the top bracket (37% ordinary, 20% long-term), and a year in which they won $136,420 and lost $68,210.
Only one of the three puts money back in your pocket: $6,957 on this win. The last one takes money out, and the reason is worth understanding. Capital treatment taxes what you netted. Gambling treatment taxes what you won, then hands your losses back as an itemized deduction, capped at winnings and, from 2026, trimmed to 90% of them. That missing 10% is $6,821 of income you never earned but are taxed on anyway.
And $2,524 is the floor, not the figure. It assumes you won $2 for every $1 you lost, which is a very good year, and that you itemize at all. Trade the same $68,210 through a bigger book and the penalty grows with every losing contract, because it is charged on your gross, not on what you took home. This is the one row where how much you traded costs you more than how well you traded.
Savings are measured against standard capital treatment. Figures are rounded to the nearest dollar and are federal only. §1256 treatment of prediction-market contracts is an unsettled position with no specific IRS guidance, and it is the aggressive end of this spectrum, not the safe default. We show the comparison; which one you file is your call with your CPA. Read the full §1256 60/40 guide or the 2026 gambling-loss limit.
The obvious question
Doesn’t Kalshi already give me this?
It gives you a record of what you did. That is not the same thing as a tax position, and the gap between them is the whole job. What a §1256 filing needs, and where a venue export stops:
A December 31 mark on every open position
Section 1256 treats what you still hold as if you closed it at the final price of the year. Once January arrives that price is gone, and no export you download later brings it back.
Per-lot cost basis, with fees, across partial fills
One position is usually many fills at many prices. A flat list of fills is the raw material for a basis calculation, not the calculation.
The 60/40 split, computed
Sixty percent long-term and forty percent short-term, whatever the holding period. That split is the entire mechanic, and it is not a number any venue reports.
A carryback decision, if you have prior gains
A net §1256 loss can reach back three years. Whether that beats carrying it forward depends on what you filed in those years, so it is a judgment call made on the return.
Both venues, netted
You file one return. Kalshi knows nothing about your Polymarket book and Polymarket knows nothing about your Kalshi book.
What arrives from a venue at tax time varies by venue, by year, and by how much you traded, so we will not tell you what will land in your inbox. What we can tell you is that none of the five above come out of it, and that a missing form has never been a reason not to report. Realize builds each one from your own trade history and shows you the work behind every figure.
How we calculate
What the $68,210 example assumes
- One filer, one bracket pair
- A single filer in the top federal band: 37% on ordinary income and 20% on long-term capital gains. We picked the top of the ladder because it is where the 60/40 split is worth the most, which makes it the most favorable illustration on the page, not a typical one. Lower down, the two rates sit closer together and the advantage shrinks. The calculator above shows the whole range instead.
- Flat marginal rates, not a return
- Both figures apply a flat rate to the whole gain. A real return does more: long- term gains stack on top of your ordinary income rather than sitting beside it, the net investment income tax can apply, and any other capital activity you have nets against this. Connect your account and Realize computes from your actual per-lot record instead, which is why a connected figure will not match this one to the dollar.
- Short-term is the comparison, because these contracts settle fast
- The standard-capital row treats the whole gain as short-term. Prediction-market contracts resolve on an event, usually within weeks, so almost nothing is held the year and a day that long-term treatment would need. That is what makes the 60/40 split worth something: it grants a long-term rate on 60% of a gain that was never held long-term.
- Federal only
- No state tax anywhere on this page. States differ on whether they follow the federal treatment of these contracts, and some clearly do not.
- A strong reading, and an untested one
- Kalshi and Polymarket US are CFTC-designated contract markets, which is the part of §1256 that clearly fits. What is untested is whether a binary yes-or-no contract is an option at all in the sense the statute means, and whether the swap exclusion knocks it out. No IRS guidance, no court ruling. The IRS could disagree later, including for years you have already filed, so treat this as the aggressive end of a range and take it to a professional.
Winning years, answered
- Doesn't Kalshi already give me everything I need for my taxes?
- Not for a Section 1256 filing. Whatever your venue sends you, and that varies by venue, by year, and by how much you traded, it is a record of what you did, not a completed tax position. It will not carry a per-lot cost basis with fees, a December 31 mark on the positions you still hold, the 60/40 split that Section 1256 requires, or anything at all about the other venue you trade on. Those are the pieces a return needs, and they have to be built from your trade history.
- How much does Section 1256 actually save me on a winning year?
- It depends entirely on the gap between your ordinary income rate and your long-term capital-gains rate, because Section 1256 reprices 60% of the gain to the lower one. The saving is 60% of that gap. In the top federal bracket, 37% ordinary against a 20% long-term rate, that works out to about 10.2% of the gain. If your income is low enough that the two rates are close, there is very little to gain either way.
- Is Section 1256 treatment of prediction-market contracts settled?
- No, and we will not tell you otherwise. The IRS has issued no guidance on prediction-market event contracts and no court has ruled on the tax question. Section 1256 is the most favorable reading of the current statute for CFTC-regulated exchanges, and it is a genuinely aggressive one: the IRS could disagree, including for years you have already filed. We show the reasoning and the more conservative comparison alongside it. The filing decision is yours and your CPA’s.
- What happens to positions I still have open on December 31?
- Section 1256 treats them as if you sold them at the closing price on the last business day of the year, which is what "mark to market" means. That matters practically, not just theoretically: once January arrives, that particular price is gone, and no export you download later reconstructs it. Realize captures a daily snapshot of your open positions, so the year-end mark exists when you need it.
- I trade on both Kalshi and Polymarket. Does that change anything?
- Your return is one return, so the two have to be netted together, and neither venue can do that for you because neither knows about the other. Realize reads both through read-only API access and combines them into a single position, with every figure traceable back to the trade it came from.
- Do I owe tax if I never withdrew the money?
- Withdrawing is not what creates the tax. A gain is generally reportable when the position closes or settles, whether or not the money left the platform, and under Section 1256 open positions are also marked at year end. Leaving a balance on the exchange does not defer anything.
- Does this cover my state taxes?
- No. Everything Realize computes is federal. States differ on whether they follow the federal treatment of these contracts at all, and a few clearly do not. That is a question for a tax professional who knows your state.
See it against your own trades.
Connect Kalshi or Polymarket with a read-only key and Realize builds the position from your real fills, with every figure traceable back to the trade behind it. Tracking is free.
Important
Realize is a data tool, not a tax advisor, and gives no tax, legal, or financial advice. Every figure on this page is an illustration built on the stated assumptions, not a computed return. Verify everything and consult a tax professional before filing. State rules vary. See our full tax disclaimer.