IRS leaves tax status of Kalshi and Polymarket event contracts undefined
No guidance from the Internal Revenue Service addresses whether prediction market event contracts qualify for Section 1256's favorable tax treatment for futures and certain options. The tax code section covers S&P 500 options but does not explicitly name prediction markets or event contracts. The agency has not issued a notice, revenue ruling, revenue procedure, or publication clarifying how Kalshi or Polymarket contracts are taxed.
Traders on Kalshi and Polymarket face genuine ambiguity on April 15. Without a Section 1256 ruling, they cannot claim the 60/40 long-term capital gains split that futures traders receive. Instead they must guess whether gains are ordinary income or short-term capital gains, with the IRS free to challenge either position years later. Platform operators now field support tickets they cannot answer with confidence.
The silence also complicates institutional onboarding: allocators and compliance officers want a clear tax memo before deploying capital. The gap could close through litigation if a trader contests an audit, or through a private letter ruling from a well-funded participant. But a broad fix requires either IRS rulemaking or Congressional amendment. Neither is moving. Until one does, prediction markets carry a tax-code discount that S&P 500 futures do not.