Section 1256 Loss Carryback: Turning a Losing Kalshi Year Into a Refund

Most capital losses can only be carried forward to future years. Section 1256 contracts, which include Kalshi's, have an extra option: you can carry a net loss back up to three years and get a refund of tax you already paid.

Who it helps

The carryback only helps if you had net Section 1256 gains in one or more of the three prior years. A trader who made money on Kalshi in 2024 or 2025 and lost money in 2026 is the classic case. If this is your first year trading, there's nothing to carry back to, and the loss carries forward instead.

How it works

1. Start with the earliest year. The loss is applied to the oldest of the three prior years first, then the next, then the most recent.
2. It only offsets Section 1256 gains. In each prior year, the carryback can't exceed that year's net Section 1256 gain. It won't offset stock gains, wages or other income from those years.
3. The 60/40 split still applies. The carried-back loss is treated as 60% long-term and 40% short-term in the year it's applied.
4. It can't create a new loss. The carryback can't create or increase a net operating loss in the earlier year.
5. Anything left over carries forward. Any loss not used in the three prior years carries forward like a normal capital loss.

An example

You had a $6,000 net Section 1256 gain in 2024, nothing in 2023 or 2025, and a $9,000 net Section 1256 loss in 2026. If you make the election, $6,000 of the 2026 loss is carried back to 2024, wiping out that year's Section 1256 gain and producing a refund. The remaining $3,000 is used on your 2026 return like any other capital loss.

How to claim it

• Check box D on Form 6781 for the loss year to make the election.
• File Form 1045 or an amended return, Form 1040-X, for each earlier year you're carrying the loss back to.

The election is a choice, not a requirement, and it isn't right for everyone. It can interact with other items on your old returns, so this is a good one to work through with a tax professional.

Related: Form 6781 vs. Form 8949 and How Kalshi trades are taxed.

This guide is general information, not tax advice. Tax treatment of event contracts is still evolving, so confirm how it applies to you with a tax professional.