Treatment of Kalshi Transactions for Taxes

I’ve seen some questions on how Kalshi contracts are treated for tax purposes. Below is a summary based on my research of how Kalshi is regulated and applicable IRS guidance for how Kalshi contracts should be taxed. Wanted to share this with the group if helpful to anyone. This is not tax advice. The information provided is for general informational purposes only and should not be considered professional tax advice. Consult a qualified tax professional for advice specific to your situation.

Overview

Kalshi is the first CFTC regulated exchange dedicated to trading on the outcome of future events. From inflation, to fed rates, to unemployment, to will the government shut down, Kalshi allows people to trade on a broad range of topics. They’ve developed a new asset class, event contracts, where you can buy Yes or No positions with respect to whether an event will happen or not. Kalshi’s vision is to allow people to capitalize on their opinions, trade in the domain of every day, and hedge risks that relate to them.

Kalshi’s Event Contracts give people the ability to trade based on their opinions about a specific yes-or-no question. For example, if you have student debt and are worried about relief not passing, you can purchase a contract and get a payout even if it doesn’t pass. If you’re worried about the economic fallout of the government shutting down, you can place a trade to hedge against it. If you’ve developed a model on inflation, you can profit from that….and maybe even offset your rising costs.[1]

Kalshi

Kalshi is federally regulated as a Designated Contract Market by the Commodity Futures Trading Commission (CFTC). The CFTC is a U.S. government oversight body that has regulated the American derivatives market since 1972 and is overseen by Congress. Under the CFTC, Kalshi is regulated as a Designated Contract Market. A Designated Contract Market is a financial exchange designated to trade futures, swaps, and options on commodities. This means Kalshi must abide by all the regulations and rules set by the CFTC. Kalshi is one of the only financial exchanges centered around trading directly on events that is regulated by the CFTC.[2]

All Kalshi Contracts are deemed to be “options” as defined in 17 USC 1a(47).[3]

IRS Guidance[4]

A section 1256 contract is any:

Regulated futures contract,

Foreign currency contract,

Nonequity option,

Dealer equity option, or

Dealer securities futures contract.

Exceptions.

A section 1256 contract does not include:

Interest rate swaps,

Currency swaps,

Basis swaps,

Interest rate caps,

Interest rate floors,

Commodity swaps,

Equity swaps,

Equity index swaps,

Credit default swaps, or

Similar agreements.

For more details, including definitions of these terms, see section 1256.

Nonequity option. 

This is any listed option (defined later) that is not an equity option. Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index).

Listed option.

This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). A listed option, however, does not include an option that is a right to acquire stock from the issuer.

A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission (SEC).

Mark-to-Market Rule

A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the Example under 60/40 rule below.

60/40 rule. 

Under the mark-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long you actually held the property.

Conclusion

Kalshi contracts are “listed options” regulated by a qualified board or exchange (CFTC), making them “nonequity options” and 1256 contracts. Therefore, Kalshi contracts are Section 1256 contracts, and all gains and losses are capital gains/losses for tax purposes, with gains and losses treated as 60% long-term and 40% short-term, regardless of the holding period.

Links

[1] https://kalshi.com/about

[2] https://kalshi.com/blog/article/how-is-kalshi-regulated

[3]https://www.cftc.gov/sites/default/files/filings/documents/2020/orgkexexhibitmrulebook200114.pdf

[4] https://www.irs.gov/publications/p550#en_US_2023_publink100010328