Three ways to file your prediction-market trades.

The three routes at a glance

All three are used in practice. They differ in the forms you file, the rate you pay, and how much support the position needs.

1. Ordinary income — the conservative route.Net result reported as other income on Schedule 1, line 8z. Simplest to file, hardest to challenge, and the most expensive: everything is taxed at your marginal rate.
2. Capital gain or loss — the common middle.Trades reported on Form 8949 flowing to Schedule D, with character set by holding period. Many practitioners land here for regulated platforms like Kalshi. Losses carry forward.
3. Section 1256 — the favorable route.Reported on Form 6781, which applies the 60/40 split automatically and carries to Schedule D. Lowest effective rate, and net losses can be carried back three years. It is also the position that requires the most support.

What the difference is worth

Section 1256 treats 60% of your net result as long-term and 40% as short-term regardless of how long you held. On a $100,000 net gain, against straight ordinary treatment:

Assumes a 20% long-term capital-gains rate. The benefit scales with your bracket — which is why it matters most to high earners and barely at all to everyone else.

Route 1 — Ordinary income

The most conservative treatment. You report your net figure for the year as other income; there is no per-trade entry.

1. Calculate your net resultTotal settlements minus total cost of contracts for the calendar year, from your own platform export.
2. Report on Schedule 1, line 8zWith a short description such as “event-contract income.” In TurboTax this is under Less Common Income → Miscellaneous Income.

Route 2 — Capital gain or loss

Here your contracts are treated as property under §1001 with character determined under §1221 — the same framework as any other investment position.

1. Report each disposition on Form 8949Acquisition date and cost, settlement date and proceeds, per position.
2. Carry the totals to Schedule DShort-term if held a year or less, which in practice is almost every event contract.
3. Unused losses carry forward$3,000 against ordinary income per year, remainder carried to future years indefinitely.

Rate-wise this usually lands close to ordinary treatment, since event contracts rarely reach long-term holding. The real advantage is on the loss side: capital losses are usable, where ordinary nonbusiness losses often aren’t.

Route 3 — Section 1256

If you and your preparer conclude your contracts qualify, the mechanics are well-defined:

1. Net your full-year result, then mark open positions to marketAny contract still open on December 31 is treated as sold at its year-end fair value and reacquired at that value.
2. Complete Form 6781, Part ILine 1 carries your aggregate net gain or loss from all §1256 contracts. The form applies the 60/40 split for you.
3. Let it flow to Schedule D40% short-term to Schedule D line 4, 60% long-term to line 11. Do not use Form 8949 for these — that is the most common filing error on this route.
4. Consider the loss carrybackA net §1256 loss can be carried back up to three years against prior §1256 gains, which can produce a refund. No other route offers this.
5. Attach a Form 8275 disclosureThis flags the position on its face. It does not concede anything — it protects against accuracy-related penalties if the IRS later disagrees.

In TurboTax this lives under Investment Income → Contracts and Straddles, which generates Form 6781. The 8275 disclosure is harder to do in consumer software, which is one reason filers taking this route usually work with a preparer.

The case for §1256 — why it’s legitimately arguable

This is not a fringe position invented by traders. There are real statutory arguments, and serious practitioners raise them:

1. The venue plainly qualifies.§1256 applies to contracts traded on or subject to the rules of a “qualified board or exchange,” which expressly includes a CFTC-designated contract market. Kalshi is a DCM. That element is satisfied on its face.
2. The contracts look institutional, not recreational.Standardized terms, exchange-listed, centrally cleared, continuously priced, cash-settled. They behave like exchange-traded derivatives, and the regulatory framework treats them as such.
3. Congress wrote §1256 for exactly this kind of instrument.The regime exists to give a workable rule to short-dated, marked-to-market, exchange-traded contracts where holding-period rules produce odd results. Event contracts fit that shape.
4. The statute is silent, not hostile.No provision names event contracts and excludes them. The question is genuinely open — which is why disclosure exists as a mechanism.

What your CPA will weigh against it

An honest look at the other side, because these are the arguments that decide the question:

1. Venue alone isn’t enough.§1256 is not an election. A contract must fall into an enumerated category — regulated futures contract, nonequity option, and a few others — not merely trade somewhere qualified.
2. The swap exclusion is the strongest counterargument.CFTC product filings classify event contracts as binary options that are swaps. §1256(b)(2)(B) was added specifically to keep swaps out of 60/40 treatment. Any serious §1256 position has to answer this.
3. The RFC path has a structural gap.A regulated futures contract contemplates a daily mark-to-market margining system. Binary event contracts generally don’t work that way.
4. Leading practitioner analysis is unfavorable.A 2026 analysis in Tax Notes Federal argues §1256 is not available for event contracts under current statutory definitions. That’s the journal IRS and Treasury staff read.

How to decide — with your CPA

1. Start with clean records, whichever route you take.Every route needs acquisition cost, settlement amount and dates, contract by contract. Platforms don’t reliably issue a usable 1099 for event contracts, so export your own transaction history and keep it.
2. Know what the choice is actually worth to you.The §1256 benefit scales with your bracket. At 24% on a modest gain it may not justify the analysis and disclosure; at 37% on six figures it clearly can. Run your real numbers before spending money on the question.
3. Separate your contract types.Contracts on macroeconomic data and rate decisions carry the strongest argument. Sports-outcome contracts sit closest to wagering and are the weakest case. Treating everything as one undifferentiated bucket is its own risk.
4. If you take §1256, do it properly.Written analysis, Form 6781, Form 8275 disclosure, consistent application year over year. A position taken carefully and disclosed is a very different thing from one taken quietly and hoped over.

How BetTax Pro helps

BetTax Pro imports your event-contract activity and reconstructs cost and settlement per contract — the underlying records every one of these routes depends on, and the part platforms won't hand you. It then models the two treatments it can compute cleanly from that data: ordinary income under §165 and contracts under §1256, side by side, so you can see what that choice is actually worth before you pay anyone to argue it.

Capital treatment is deliberately left to your preparer. Form 8949 turns on per-disposition holding periods and basis decisions that belong in a return, not a projection — so BetTax Pro gives your CPA the transaction-level records that route needs rather than a finished schedule.

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