Does Section 1256 Apply to Kalshi and Polymarket? The 60/40 Rule Explained

Of the four ways prediction-market trades get reported (covered in full in our overview post), Section 1256 is usually the one people want to be true, because it’s usually the cheapest. It’s also the one with the least settled legal footing. Here’s the actual argument, not just the headline rate.

What Section 1256 actually does

Section 1256 of the tax code applies to a specific list of contract types (regulated futures contracts, foreign currency contracts, and a few others) and gives them two unusual breaks. First, every gain or loss is automatically split 60% long-term and 40% short-term, regardless of how long you actually held the position. A contract you opened and closed in an hour still gets the 60% long-term rate on most of the gain. Second, open positions are marked to market at year-end, meaning unrealized gains and losses are counted for tax purposes even before you close the position. Gains and losses are reported on Form 6781, not Form 8949.

For someone trading dozens of short-lived event contracts a year, the 60/40 split alone can be a meaningfully lower effective rate than ordinary short-term capital gains, which is why this is the treatment traders are most eager to claim.

The actual legal question

Section 1256 doesn’t apply to “anything traded on an exchange.” It applies to contracts traded on, or subject to the rules of, a qualified board or exchange, which generally means a CFTC-designated contract market (DCM) or a registered futures exchange, for contracts that function like futures contracts. Whether an event contract (a bet on a binary or multi-outcome real-world event, not a traditional futures product) actually qualifies is the open question, and credentialed tax professionals genuinely disagree on the answer.

Kalshi’s case

Kalshi is a CFTC-designated contract market. That’s the strongest single fact in favor of Section 1256 treatment for Kalshi contracts: trading on a DCM is the threshold requirement. What’s not settled is whether the IRS would treat Kalshi’s specific event contracts as the kind of “regulated futures contract” Section 1256 was written for, since the statute and its regulations were drafted with traditional futures in mind, not binary event contracts. No IRS ruling or court case has addressed this directly as of this writing.

Polymarket’s case, and a real wrinkle

The original Polymarket, the wallet-based, on-chain platform most traders actually use and the one this site’s own connector reads from, is not a CFTC-regulated exchange. That makes the Section 1256 argument considerably weaker there; several tax professionals consider it not defensible at all for on-chain Polymarket activity specifically.

Here’s the wrinkle: in November 2025, the CFTC issued an amended order of designation permitting a separate, newly formed entity, Polymarket US (operated by QCX LLC), to run as a CFTC-regulated designated contract market. That’s a real, meaningfully different regulatory status from the original platform. If you trade through Polymarket US specifically (a distinct onboarding path via regulated brokers, not the public wallet flow), the Kalshi-style argument for Section 1256 applies with much more force. If you trade the original wallet-based Polymarket, it doesn’t change anything: you’re still on the weaker side of the argument. This distinction matters, and it’s easy to conflate the two if you’re skimming headlines.

The mark-to-market catch

Section 1256’s year-end mark-to-market rule cuts both ways. If you have open positions on December 31st, you’re required to recognize their unrealized gain or loss as if you’d closed them that day, using their fair market value, which for an event contract means its market price at year-end, not a price you actually received. That requires pulling a real end-of-year price for every open position, and it means you could owe tax on a position you haven’t actually cashed out. This is a genuine complexity, not a footnote: any tool or spreadsheet that only handles closed positions is silently incomplete if you carry positions across December 31st under this treatment.

Where this leaves you

Section 1256 is a real, live argument for Kalshi trades specifically, weaker for the original Polymarket, and strong for the newly regulated Polymarket US venue. It’s also exactly the kind of aggressive, unsettled position that benefits from a second opinion before you rely on it. Compute what it would actually save you first, then decide whether that’s worth the legal exposure, ideally with a CPA who’s looked at the specific argument, not just the tax bill.