Short-Term Capital Gains

Short-term capital gains apply to assets held for one year or less before disposition. They are taxed at your ordinary income tax rate — the same rates that apply to wages and salary. Since prediction market contracts almost always settle within days or weeks, virtually all prediction market capital gains are short-term.

Impact on prediction market traders

Because short-term gains are taxed at ordinary income rates, the capital gains method for prediction markets essentially produces the same tax rate as the ordinary income method for profitable traders. The advantage of capital gains treatment comes from loss handling — capital losses can offset gains and provide a $3,000 annual deduction.

The Section 1256 difference

This is exactly why Section 1256 is attractive: it converts what would be 100% short-term gains into a 60/40 long-term/short-term split, potentially saving 10–17 percentage points on 60% of your gains.