Kalshi Taxes and Polymarket Gains: Does the 60/40 Rate Actually Apply?

Why this isn't a simple yes

Section 1256 exists for regulated futures contracts, and it's generous when it applies: 60 per cent of the gain is taxed at long-term capital gains rates and 40 per cent at short-term, regardless of how long you actually held the position. The rule was built around standardized futures, think E-mini contracts on the CME, with fixed sizes, dates, and settlement terms. Kalshi and Polymarket's binary event contracts aren't standardized in that sense, but they are regulated: both trade on CFTC-designated contract markets, with the reporting requirements that come with that designation.

Pulling the CFTC's own industry filings, there are 30 currently active Designated Contract Markets in the U.S. Only three of them are prediction markets as most people would recognize the term today.

I have some firsthand context here beyond the tax code. I was CFO of IMX Health, LLC, itself a designated contract market on that same CFTC list before it was acquired in May 2026 by Architect Financial Technologies, a perpetual futures exchange based in Chicago. Sitting inside a DCM gives you a clearer view of what CFTC designation actually requires operationally, and it's a meaningfully different bar than simply "being regulated." That distinction matters here: CFTC registration alone does not automatically confer Section 1256 status. The statute, 26 USC 1256, asks whether the contract is marked to market and traded on a qualifying exchange, and DCM status satisfies the second half of that test. It does not, by itself, resolve whether a binary event contract is the kind of instrument Congress had in mind when it wrote the section.

Where the IRS actually stands: nowhere

As of this writing, the IRS has not issued guidance on how prediction market contracts should be taxed, and it's been conspicuously quiet even as trading volume climbs. Part of that silence is political rather than technical. States including Kentucky have moved to regulate event contracts as gambling, while the platforms maintain they're offering CFTC-regulated financial products, not wagers. Until that federal-versus-state fight settles down, I don't expect the IRS to wade in voluntarily.

That leaves taxpayers relying on statutory interpretation instead of a clear ruling, and there are real gaps: whether an outcome like an election or a rate decision counts as a valid Section 1256 underlying, and whether these binary payout structures qualify as "nonequity options" under the section. Absent 1256 treatment, gains default to ordinary capital gains and loss rules, taxed fully at short-term rates unless the position was held more than a year, which is rarely the case in this kind of trading.

My take, and what I tell clients

Kalshi and Polymarket are CFTC-regulated, but they are not standardized contracts in the traditional futures sense. My view is that the IRS could rule before year-end, but is more likely to stay silent given the contentious fight over who gets to regulate this activity. Given that, I still think 60/40 treatment is a defensible position that produces a materially better tax outcome for active traders, but only if the client understands they're taking a position on an open question, not applying settled law. We document that risk explicitly, typically with a Form 8275 disclosure statement, before a return goes out the door.

There's a second wrinkle specific to this client's structure. The 60/40 characterization happens at the individual level, and getting there through an LLC is not as clean as it sounds. A multi-member LLC reports its trading gains on Form 1065, and each member then applies the 60/40 split on their own Schedule D. A single-member LLC, by contrast, is disregarded for federal tax and files no Form 1065 at all: everything lands directly on the owner's return. With two or more members, the K-1 mechanics get genuinely messy, and messier with each member you add.

Why we still recommended the LLC over a C-corp

For most institutional-style trading entities, my default recommendation is a C-corp election, and I said so here too. This client declined and stayed with a pass-through LLC, and honestly, for this fact pattern, I don't disagree with where they landed. A C-corp brings two layers of tax, once on the income and again on distribution or sale, no preferential capital gains rate at the corporate level, and it's very unlikely to qualify for QSBS treatment since the income here is trading income, not the kind of active operating business QSBS was built to reward. The LLC keeps a single layer of tax and preserves whatever capital gains character the trading activity produces, which for this client's expected volume is the more valuable outcome.

Quick answers for prediction-market traders

Do you have to pay taxes on Kalshi winnings? Yes. Gains are taxable whether or not you receive a form. Kalshi issues a 1099-INT, 1099-MISC, limited 1099-B, or 1099-DA depending on your activity, but no comprehensive 1099-B covering your event contract gains for the year; that number gets reconstructed from the trade history.

Are Kalshi losses tax deductible? Under capital treatment, losses offset gains plus $3,000 of other income a year. If the activity were ever characterized as gambling, losses would offset only winnings, and only at 90 per cent starting with the 2026 tax year. One more reason the characterization question is not academic.

Does trading through an LLC change how the gains are taxed? No. The entity passes through whatever character the contracts have. It earns its keep on structure, expenses, and records, not on the rate.

Where this leaves you

If you're trading event contracts through an entity, or thinking about how to structure one, the tax treatment isn't settled and the accounting has to be built to support whichever position you take. Happy to talk through your specific setup: questions on event-contract accounting, Section 1256 positions, or structuring a trading entity, get in touch.