Section 1256

Section 1256 of the Internal Revenue Code provides special tax treatment for "regulated futures contracts" and certain other financial instruments. The key benefit is the 60/40 split: 60% of gains are taxed as long-term capital gains and 40% as short-term, regardless of how long you held the position.

Why it matters for prediction markets

Most prediction market trades are held for days or weeks (short-term), meaning all gains would normally be taxed at ordinary income rates (up to 37%). Section 1256 shifts 60% to the lower long-term rate (usually 15%), which can save thousands of dollars.

Tax savings example

$50,000 net prediction market profit, 32% marginal bracket:

• All short-term: $50,000 × 32% = $16,000
• Section 1256: ($30,000 × 15%) + ($20,000 × 32%) = $4,500 + $6,400 = $10,900
• Savings: $5,100

Eligibility requirements

For Section 1256 to apply, the contracts must be "regulated futures contracts" traded on a qualified exchange. For prediction markets:

• Kalshi: Strong argument — CFTC-regulated DCM
• Interactive Brokers ForecastEx: Possible — CFTC oversight
• Polymarket, DraftKings, Robinhood: Unlikely — not CFTC-regulated futures

Risk level

Section 1256 for prediction markets is considered an "aggressive" tax position because the IRS has not explicitly confirmed that event contracts qualify. However, the legal argument is based on the plain language of the statute and Kalshi's DCM designation. Many tax professionals support this position for Kalshi trades.

Additional requirements

• Open positions must be marked to market on December 31
• Reported on Form 6781, not Form 8949
• Cannot selectively apply — must be used for all qualifying contracts