Form 6781

IRS Form 6781, "Gains and Losses From Section 1256 Contracts and Straddles," is used to report trading gains and losses from regulated futures contracts under the special 60/40 tax treatment.

The 60/40 split

Section 1256 provides a unique tax benefit: regardless of how long you held a position, gains are automatically split 60% long-term and 40% short-term. Since long-term capital gains rates (0%, 15%, 20%) are lower than ordinary income rates, this can result in significant tax savings.

Example

You earned $10,000 net profit on Kalshi in 2024. Under Section 1256:

• $6,000 (60%) taxed as long-term capital gains at 15% = $900
• $4,000 (40%) taxed as short-term capital gains at 24% = $960
• Total tax: $1,860

Under ordinary income at 24%, you'd pay $2,400. Section 1256 saves $540.

When to use Form 6781

Form 6781 is only appropriate when you're treating your prediction market contracts as Section 1256 contracts. This argument is strongest for CFTC-regulated platforms like Kalshi. Using Form 6781 for Polymarket or DraftKings trades would be difficult to defend.

Mark-to-market requirement

Section 1256 contracts must be marked to market at year-end. Open positions on December 31 are treated as if sold at fair market value, meaning unrealized gains/losses are taxable in the current year.