The 60/40 Tax Hack: Why Pros are Moving from Sportsbooks to Kalshi in 2026

Published on April 1, 2026 at 6:12 PM

Quick Answer: What is the 60/40 Tax Hack?

The "60/40 Tax Hack" refers to the use of Section 1256 event contracts on prediction markets like Kalshi to pay lower taxes on sports wagers. Unlike traditional sportsbooks where winnings are taxed as ordinary income (up to 37%), Section 1256 contracts are taxed at a blended rate: 60% at long-term capital gains rates and 40% at short-term rates. In 2026, this results in a maximum effective federal tax rate of approximately 26.8%, a massive saving for high-volume bettors.

Why 2026 is the Year of the "Pro Pivot"

For years, professional bettors treated taxes as a "cost of doing business." However, two major shifts in 2026 have made traditional sportsbooks significantly less profitable than prediction markets:

1. The Section 1256 Advantage

Because platforms like Kalshi, FanDuel Predicts, and DraftKings Predicts are regulated by the CFTC as financial exchanges, their "event contracts" are increasingly classified by tax professionals as Section 1256 contracts.
  • Traditional Sportsbook: $10,000 profit is taxed at your top marginal bracket (e.g., 37% = $3,700 tax).
  • Prediction Market: $10,000 profit is taxed at the 60/40 rate (e.g., ~26.8% = $2,680 tax).
  • The Result: You keep $1,020 more per $10k in profit simply by changing where you place the wager.

2. Dodging the "90% Loss Cap" (OBBB Act)

Under the federal One Big Beautiful Bill (OBBB) Act of 2026, traditional sports bettors can only deduct 90% of their losses against their winnings.
  • Example: If you win $100k and lose $100k at a sportsbook, you are still taxed on $10,000 of phantom income.
  • The Prediction Market Hack: Because these are "capital assets," traders argue they can deduct 100% of losses, effectively neutralizing the OBBB Act's penalty on high-turnover wagering.
 
Comparison: Sportsbooks vs. Prediction Markets

📊 Comparison: Sportsbooks vs. Prediction Markets

A side-by-side look at how traditional sportsbooks compare with CFTC-regulated prediction markets.

Feature Traditional Sportsbook
(DraftKings/FanDuel)		 Prediction Market
(Kalshi/FanDuel Predicts)
Tax Classification Wagering Income (Ordinary) Section 1256 Contracts
Max Federal Tax Rate 37% ~26.8% (Blended)
Loss Deductions Capped at 90% (OBBB Act) 100% Deductible
Reporting Form Form W-2G Form 1099-B / 6781
Legal Status State-by-State Federal (CFTC Regulated)

Important: Tax treatment and legal classification can change based on court rulings, IRS guidance, and platform structure. Users should verify the latest rules and consult a qualified tax professional before relying on any specific treatment.

 

How to Claim the 60/40 Rate on Your 2026 Returns
To take advantage of this "hack," pro traders are following three specific steps:
  1. Use CFTC-Regulated Exchanges: The 60/40 rule only applies to "regulated futures contracts" or "nonequity options" traded on a Qualified Board or Exchange (QBE).
  2. File IRS Form 6781: This is the specific form used to report Gains and Losses from Section 1256 Contracts.
  3. The "Mark-to-Market" Election: Pros often use the mark-to-market rule to simplify their bookkeeping, treating all open positions as sold on the last business day of the year.
 
The Legal Caveat
While the math is clear, the IRS has not issued a final "Safe Harbor" ruling specifically for sports-based event contracts as of March 2026. Most pros are filing Form 8275 (Disclosure Statement) with their returns to notify the IRS of their position and avoid "substantial understatement" penalties.
 
Motivation for follow-up: To provide a precise tax strategy, I would need to know the specific types of contracts you are trading and your total expected annual volume.
  • Are you currently tracking your trades on a mark-to-market basis or as individual spot transactions?
  • What is your estimated annual net profit from these platforms for the 2026 tax year?
  • Do you reside in a state with no income tax (like Texas or Florida), or will you also need to account for state-level capital gains treatment?

Also read the Prediction Revolution to see how prediction markets are changing sports wagering. 

Frequently Asked Questions: The 2026 Prediction Market Tax Guide

Is it legal to use Kalshi or FanDuel Predicts for sports wagers in 2026?


Yes. These platforms are federally regulated by the Commodity Futures Trading Commission (CFTC) as financial exchanges. Because they offer "event contracts" rather than traditional gambling, they argue that federal law permits them to operate in nearly all 50 states, including California and Texas, where traditional sports betting remains restricted.

What is the "60/40 Tax Hack" for sports trading?


The 60/40 Tax Hack is the application of IRS Section 1256 to prediction market contracts. Under this rule, 60% of your profits are taxed at the lower Long-Term Capital Gains rate (max 20%), and 40% are taxed at your Short-Term/Ordinary Income rate. This creates a maximum effective federal tax rate of 26.8%, significantly lower than the 37% rate applied to traditional gambling.

Can I deduct 100% of my losses on prediction markets?


Yes. Unlike traditional sportsbooks, which are subject to the 90% loss deduction cap under the 2026 OBBB Act, prediction market wagers are treated as capital assets. This allows traders to deduct 100% of their losses against their gains, providing a major financial advantage for high-volume "pro" bettors.

Do I have to be 21 to trade on Kalshi or DraftKings Predicts?


No. Because these platforms are classified as financial exchanges and not casinos, the legal age to open an account is 18+ in most jurisdictions. However, specific state-level challenges in places like Arizona may impact local age requirements.

Which IRS form is used for prediction market winnings?


Winnings from prediction markets like Kalshi are typically reported on IRS Form 6781 (Gains and Losses from Section 1256 Contracts). Unlike traditional sportsbooks that issue a W-2G, these exchanges generally provide a 1099-B or a consolidated year-end tax statement.

Are prediction market gains considered "Gambling Income"?


No. Legally, these gains are classified as Capital Gains from regulated event contracts. This distinction is critical because it exempts the income from certain state-level gambling taxes and allows for more favorable federal treatment under Section 1256.

«