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Tax-loss harvesting means closing a losing position before the year ends so the loss counts on this year's return, where it offsets your gains. Stock traders do it every December. For prediction market traders, whether it helps depends on how your trades are taxed.
On Kalshi, harvesting usually doesn't change anything
Kalshi contracts are reported as Section 1256 contracts. Under Section 1256, every position you still hold on the last business day of the year is treated as if you sold it at that day's market price. This is called mark-to-market.
That means a losing Kalshi position already counts on this year's return, whether you close it or not. Selling it in December locks in the same loss you'd report anyway, and it costs you a trading fee. The only reason to close it is if you no longer want the position.
On Polymarket, it can make a real difference
If your Polymarket trades use standard holding-period treatment, a gain or loss only counts when the position is closed or the market resolves. A losing position you still hold on December 31 does nothing for this year's taxes.
Close it before year end, and the loss is realized this year. It offsets your other capital gains first. If losses exceed gains, up to $3,000 of the excess ($1,500 if married filing separately) can offset other income such as wages, and the rest carries forward to future years.
An example
| Position | Hold into January | Close in December |
|---|---|---|
| Realized short-term gains this year | $5,000 | $5,000 |
| Open Polymarket position, down $1,800 | $0 | −$1,800 |
| Taxable short-term gain | $5,000 | $3,200 |
In the 24% bracket, closing the position saves about $432 in federal tax this year.
Things to watch
- The wash sale rule. For stocks, you can't claim a loss if you buy the same position back within 30 days. Whether that rule applies to event contracts is unclear. The cautious approach is not to rebuy the same outcome within 30 days.
- Thin markets. The price on screen isn't always the price you'll get. A wide spread or low volume can make closing cost more than the tax you save.
- Fees. Closing a position costs a trading fee, which is usually small but adds up across many positions.
- If you treat Polymarket as 60/40. If you and your advisor treat Polymarket positions as Section 1256 contracts, they're marked to market at year end like Kalshi's, and harvesting doesn't help.
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.