The Tax Break Called ‘Section 1256’ Covers Futures and S&P 500 Options. It Never Mentions Kalshi or Polymarket

Plenty of people who trade event contracts on Kalshi and Polymarket also trade futures or S&P 500 index options. They know the perk those positions carry: a combined tax rate that treats most of the gain as long-term, however briefly the position was held. So it’s tempting to assume a contract on next month’s inflation report or an election result gets the same deal.

That assumption lacks legal support. The Internal Revenue Code never names prediction markets or event contracts, and no IRS notice, revenue ruling, revenue procedure or publication specifically addresses how prediction market event contracts are taxed. Below: what the futures break covers, where event contracts fall into the gap, and what guessing wrong could cost.

How the 60/40 Rule Turns Quick Trades Into Mostly Long-Term Gains

A “section 1256 contract” is a category of derivative that gets special tax handling. IRS Publication 550, Investment Income and Expenses (2025 edition), lists them in its “Section 1256 Contracts Marked to Market” discussion, matching 26 U.S.C. § 1256(b)(1): regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options and dealer securities futures contracts.

A non-equity option is a listed option that isn’t tied to individual stocks. Publication 550 says the group includes debt options, commodity futures options, currency options, and broad-based stock index options, such as options on the S&P 500. Ordinary options on a single stock count as equity options and fall outside the rule. The only equity options covered are those held by registered options dealers.

Publication 550’s “60/40 rule” makes 60% of the gain or loss long-term and 40% short-term under 26 U.S.C. § 1256(a)(3), “regardless of how long you actually held the property.” The publication’s own example: a futures contract bought for $50,000 was worth $57,000 on the last business day of the year, producing a $7,000 gain split 60% long-term and 40% short-term.

Why Event Contracts Sit in a Tax Gray Area

To count as a regulated futures contract under 26 U.S.C. § 1256(g)(1), a contract must use a daily marking-to-market margin system and trade on or under the rules of a “qualified board or exchange.” Section 1256(g)(7) defines that as an SEC-registered national securities exchange, a CFTC-designated contract market, or another market the Treasury determines has rules adequate to carry out the purposes of § 1256.

The IRS decides those exchange questions one at a time. In Rev. Rul. 2026-16, Section 1256 Contracts Marked to Market, it held that ICE Endex, a regulated Dutch exchange, qualifies under § 1256(g)(7)(C) for contracts entered into on or after September 1, 2026.

Even then, the contract itself has to fit. An event contract that pays a fixed amount if something happens could be viewed as a futures contract, an option, a swap-like agreement (swaps and “similar agreements” are excluded by § 1256(b)(2)(B)), or a wagering transaction. That question remains open. CNBC’s Jim Cramer summed up the broader regulatory picture in October: “Right now everything is wild west.”

Seven Tax Traps Event Contract Traders Should Watch

• Classification risk. The same profit could be treated as a section 1256 gain, a regular capital gain where holding period matters, ordinary income, or wagering income. The IRS hasn’t resolved which applies.
• The wagering loss trap. If the activity were ever treated as wagering, 26 U.S.C. § 165(d) caps the loss deduction at 90% of losses, and only up to that year’s wagering gains. Take a hypothetical trader with $20,000 in winning contracts and $20,000 in losers. As capital gains and losses, they net to zero. Under § 165(d), deductible losses top out at $18,000, so tax is owed on a break-even year. Publication 529 also says such losses are claimed only as an itemized deduction, so a retiree taking the standard deduction could get no offset at all.
• Year-end marking. Under Publication 550’s “Mark-to-Market Rule,” a section 1256 contract still open on the last business day of the year is treated as sold at its fair market value, so you owe tax on paper gains. Claim 60/40 treatment and you sign up for this rule too.
• Wash sale relief. A wash sale is triggered by selling at a loss and buying something substantially identical around the same time, which normally blocks the loss. Section 1256(f)(5) switches that rule off for losses from year-end marking, but only for genuine section 1256 contracts.
• IRS examination. Notice 2026-62, Guidance and Other Actions Being Considered Regarding Certain Potentially Abusive Investment Fund Strategies Involving Financial Products, studies fund strategies that use regulated futures contracts that would be marked to market under § 1256 to shape tax results. Its focus is investment fund strategies, and it leaves prediction markets unaddressed. Still, it shows the IRS is watching how section 1256 treatment gets used.
• Mixed accounts. If you hold true futures or broad index options alongside event contracts, the 60/40 treatment on the futures doesn’t automatically carry over to the event contracts.
• Reporting. You still have income to report even if no tax form comes. Taxable income is reportable either way.

What Would Settle the Question for Event Contract Traders

Clarity would come from an IRS or Treasury notice, a revenue ruling, or regulations that address event contracts directly. The comment period on Notice 2026-62 closed October 28, 2026, and any follow-up guidance on section 1256 strategies needs a close read.

Until then, keep records of every trade: date, contract, platform, cost, proceeds and any positions open at year-end. Separate records for wins and losses will help under any of the possible treatments. Before you file, run those numbers with a tax professional who understands derivatives.

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