Forecast contracts — the binary or scalar event contracts traded on CFTC-regulated venues like Kalshi (and on unregulated foreign or crypto-native platforms like Polymarket) — became mainstream after the 2024 CFTC settlement that allowed Kalshi to list contracts on U.S. election outcomes. Tax treatment of these instruments is genuinely unsettled. The IRS has not issued guidance specific to them, and the venues themselves report customer income inconsistently (typically on Form 1099-MISC, sometimes on 1099-B, sometimes not at all). The framework below sets out the conservative-and-likely-correct position; for any meaningful amount of forecast-contract income, get a written position from a tax professional before filing, because IRS guidance or a Tax Court decision could shift the answer in the next few years.
Not Section 1256. The 60/40 long-term/short-term mark-to-market treatment under IRC §1256, “Section 1256 contracts marked to market” does not apply. Forecast contracts do not fit any of the four enumerated categories in IRC §1256(b)(1) (regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options), and IRC §1256(b)(2)(B), added by Dodd-Frank, explicitly excludes the broader category of swaps and similar agreements — the carve-out was written precisely to prevent contracts traded on regulated exchanges from sliding into Section 1256 by accident. The IRS preamble to REG-111283-11 reinforces that “regulated futures contract” is limited to instruments with the characteristics of traditional futures, and an event contract is not one.
Ordinary income, not capital gain. Capital-gain treatment under IRC §1222, “Other terms relating to capital gains and losses” requires a “sale or exchange.” Cash settlement of a forecast contract is not a sale or exchange — the contract is simply resolved and the position closes by payment. The bootstrap argument under IRC §1234A(1) that the contract itself is a capital asset whose termination produces capital gain has some support in commentary but is widely regarded as the weak form of the argument; the more durable position is that a forecast contract has no underlying property of the kind §1234A contemplates. The result: gain on settlement is ordinary income, reported on Schedule 1 line 8z (“Other income”) with a clear description. If you do sell the contract before settlement to another counterparty rather than holding to expiration, the analysis shifts — a true sale of a capital asset produces capital gain — but the practical reality is that secondary-market liquidity in these contracts is thin and almost no one closes a position that way.
NIIT still applies. The 3.8% NIIT (section “Net Investment Income Tax (NIIT)”) reaches forecast-contract income even though it is ordinary rather than capital. Reg. §1.1411-4(d)(1) defines “disposition” broadly to include “a sale, exchange, transfer, conversion, cash settlement, cancellation, termination, lapse, expiration, or other disposition,” which catches the cash settlement of an event contract squarely. The ordinary-versus-capital question shifts only the marginal rate; the surtax applies either way if you are above the $200,000 single / $250,000 joint threshold.
1099 reporting mechanics. Venues that 1099-report typically use 1099-MISC for realized gains, with the gross winnings rather than the net of losses. Losses get tracked separately and may or may not be reported on the same form. The mismatch creates exactly the trap covered in section “Types of Form 1099”: report the gross 1099-MISC amount as received, then enter a negative adjustment on Schedule 1 for the loss offset against the same activity, with a description like “Net of losses on Kalshi event contracts: gross 1099-MISC $X, realized losses $Y, net $Z.” This clears the automated underreporting match and preserves the substantive position that the taxable amount is the net, not the gross.
The honest disclaimer. This area is moving. IRS guidance, a Treasury notice, or a Tax Court ruling could clarify the treatment within a few years, and may land somewhere other than the analysis above. For any meaningful amount of forecast-contract income, get a written position from a tax attorney or CPA who has actually examined the contracts in question. The cost of a one-hour consultation is small relative to the audit exposure on a novel position taken without professional cover.