The four methods, explained
Your report shows four numbers and gets out of the way. Here’s the plain-English version of how each one is worked out, when it actually fits, and the two worksheet details that trip people up: the gambling loss rule and last year’s carryforward.
Capital gains
Treated like stocks or crypto.You pay tax on your net profit for the year. If you lost money overall, you can subtract up to $3,000 from your other income and carry the rest to future years. Positions held over a year get lower long-term rates, but almost all prediction-market trades are short-term.
When it fits: The common default, and what most crypto tax preparers use.
Ordinary income
Added to your income like a paycheck.Your net profit is taxed at your normal income rate. Losses reduce it directly, with no $3,000 cap and no need to itemize. Simple to file, but usually a higher rate than capital gains in a profitable year.
When it fits: Simplest to file. Often not the cheapest.
Gambling
Treated as wagering.You report your total winning days as income. You can only deduct losses if you itemize, and starting in 2026 a new law caps how much loss you can deduct. If you take the standard deduction you cannot deduct losses at all, which can tax you on your winnings even in a year you broke even.
When it fits: Usually the worst result for a trader. Shown so you can see what to avoid.
If you itemize deductions
Losses are deductible up to your winnings (§165(d)). A net-losing year can net to $0 taxable income here; you just can’t deduct more than you won.
If you take the standard deduction
Losses aren’t deductible at all. Winnings are still taxed, even in a year you broke even or lost money overall. About 90% of filers take the standard deduction, which is why this method is usually the worst result.
Section 1256 (60/40)
Treated like regulated futures.60% of your net gain is taxed at the lower long-term rate and 40% at the short-term rate, no matter how long you held. Often the lowest bill. Whether prediction-market contracts qualify is contested and needs a CPA's sign-off.
When it fits: Potentially the lowest, but legally aggressive. Confirm with a CPA.
Carrying forward last year’s capital loss
If last year’s Schedule D left you a capital loss bigger than the $3,000 you were allowed to deduct, the excess carries forward to this year, and it keeps its character. Take both figures from last year’s Capital Loss Carryover Worksheet (in the Schedule D instructions) and enter them on the report as positive dollars; the report applies the sign for you.
Short-term
Goes to Schedule D, line 6, netting against this year’s short-term gains and losses first.
Long-term
Goes to Schedule D, line 14, netting against this year’s long-term gains and losses first.
This only feeds the capital-gains method. The other three methods don’t use a carryforward.
See these methods run on your own trades
The report puts all four methods to work on your real Kalshi export or Polymarket wallet, and flags the cheapest one.
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