Kalshi Market Maker Taxes: Federal Tax and Accounting Issues for Professional Trading Firms

Last Updated on August 23, 2026 by Patrick Camuso, CPA

Quick answer (read this first)

Professional market making on Kalshi can present a substantially more complicated federal tax and accounting profile than occasional prediction-market trading. Two-sided quoting, automated execution, short holding periods, substantial transaction volume, liquidity-related payments, and operation through a dedicated business entity can all become relevant to the analysis.

None of those facts creates a separate federal tax classification for a “Kalshi market maker.” The Internal Revenue Code does not prescribe a particular treatment merely because a taxpayer provides liquidity or participates in a formal exchange market-maker program. The analysis still depends on the capacity in which the taxpayer conducts the activity, the legal characteristics of the contracts being traded, the manner in which positions are acquired and concluded, and the application of the relevant tax provisions.

For a professional trading firm, the accounting questions can be equally consequential. An annual platform P&L may describe the economic result of the trading activity without providing all of the information needed to analyze basis, recognition, loss limitations, economically related positions, year-end open positions, or the treatment of fees and incentives. As trading volume increases, the ability to reconcile the underlying transaction record to the books and tax return becomes an increasingly important part of the filing position.

For the broader federal characterization issues outdie of Kalshi market maker taxes that apply across prediction-market participants and platforms, see our prediction market tax guide.

What “market maker” means on Kalshi

The phrase “market maker” can describe different aspects of a prediction-market operation.

At the execution level, a maker generally places an order that rests on the order book until another participant executes against it. A professional liquidity provider may generate a substantial portion of its activity in this manner while also taking liquidity when necessary to rebalance risk, respond to changing prices, or manage existing positions. Maker and taker activity therefore describe execution behavior without necessarily defining the broader nature of the taxpayer’s business.

Kalshi separately maintains a formal Market Maker Program. As of August 2026, its public materials describe designated market makers as participants that agree to provide consistent two-sided liquidity and satisfy specified quoting and volume requirements. Kalshi also identifies potential program benefits, including reduced fees and certain adjusted position limits.

Formal program status may provide relevant evidence concerning how a participant conducts its activity, but the tax significance of those facts must be determined under the applicable Code provisions. A taxpayer can engage in economically significant liquidity provision without holding a particular exchange designation, while formal designation does not itself establish dealer status, contract character, or another federal tax consequence.

The tax analysis therefore begins with the taxpayer’s actual activities and the governing statutory requirements rather than the commercial label attached to the participant.

Trade-or-business status for professional Kalshi activity

A professional trading operation may need to determine whether its activity rises to the level of a trade or business under Section 162.

Published IRS guidance does not establish a Kalshi-specific transaction count, notional threshold, fill count, or degree of automation that determines business status. The closest IRS trader guidance addresses securities and considers facts such as substantiality, continuity and regularity, typical holding periods, transaction frequency and dollar amount, the time devoted to the activity, and whether the taxpayer seeks to profit from short-term market movements. That guidance is useful in identifying the types of operating facts considered in the securities context, but it does not classify prediction-market activity or event contracts.

A professional Kalshi operation may present a substantial body of business facts. Trading may occur throughout the year through automated systems, dedicated personnel may support the operation, significant capital may be committed to the strategy, and the taxpayer may seek recurring trading profits from spreads, temporary pricing differences, or short-duration positions. The significance of those facts depends on the complete record rather than any single measure of scale.

Where trade-or-business status is established, it can affect the treatment of operating expenses and a variety of entity and owner-level issues. It does not determine the character of the underlying contract gains and losses. Property does not cease to be capital property solely because it is important to a business, and a Section 162 conclusion does not determine whether another specialized statutory regime applies to a particular contract or transaction.

Taxpayer capacity and contract classification accordingly remain separate inquiries even when both are relevant to the ultimate return treatment.

Market-maker status and the dealer question

The dealer analysis requires additional care because the commercial concept of market making can resemble activities that receive specific treatment under provisions of the tax law.

Section 475 illustrates the issue. In the securities context, the statutory definition of a dealer focuses on a taxpayer that regularly purchases securities from or sells securities to customers, or regularly offers to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers in the ordinary course of its trade or business. IRS securities guidance likewise distinguishes dealers from own-account traders in significant part by reference to customers and the taxpayer’s intermediary or market-making role.

Those rules cannot simply be transferred to prediction-market contracts without first addressing the statutory predicates to which they apply. A proprietary trading firm may quote on both sides of a market, seek spread economics, and provide substantial liquidity without those commercial facts alone resolving its status under Section 475 or another dealer provision.

The relevant provision, instrument definitions, taxpayer role, customer facts, and other statutory requirements must therefore be considered on their own terms. Formal market-maker status on Kalshi is one fact in that analysis, not a substitute for it.

Where Section 475 enters the analysis

Section 475 is sometimes raised when a prediction-market operation becomes large, systematic, and trading-focused because the provision contains specific rules for dealers and traders in defined securities and commodities.

The threshold questions should remain threshold questions. Section 475 uses statutory taxpayer and instrument definitions that must be satisfied before its other consequences become relevant. For prediction-market activity, those questions cannot be answered merely from high trading volume, an exchange market-maker designation, two-sided quoting, or the fact that the operation conducts a trade or business.

Historical elections and accounting methods may become relevant where the statutory predicates are otherwise satisfied, but the first inquiry remains whether those predicates are present at all. This article does not take a position on whether any particular Kalshi contract or market-making operation satisfies them.

That treatment preserves the distinction between professional market activity as an operating fact and the statutory classifications that govern the tax result.

Section 1256 and Kalshi event contracts

Kalshi’s status as a CFTC-regulated Designated Contract Market naturally places Section 1256 among the provisions that professional market makers and their advisers may need to consider.

Section 1256 applies to defined categories of contracts, including regulated futures contracts and certain listed nonequity options, each of which has its own statutory requirements. The status of the venue can therefore be relevant to part of the analysis without determining whether a particular event contract falls within a Section 1256 category.

This separation between venue qualification and contract qualification is particularly important for prediction markets. Regulatory terminology and exchange status can supply relevant facts, but federal income tax classification ultimately depends on the requirements Congress placed in the applicable tax provision.

A platform-wide assumption is consequently difficult to support merely because different event contracts trade through the same Kalshi account. Contract terms, legal rights, settlement mechanics, and potentially applicable exclusions can differ among products and must be considered where material.

Our separate analysis of Section 1256 and prediction markets addresses that statutory framework in greater detail.

Losses in a two-sided trading book

Market-making economics are ordinarily evaluated at the strategy or portfolio level. A firm may maintain positions on both sides of markets, hold related positions across different markets, rebalance throughout the trading day, and measure profitability by reference to the combined result of those activities.

Federal loss provisions may require a more granular analysis. An otherwise allowable loss can depend on the taxpayer’s basis, the event fixing the loss, its character, and the application of provisions that affect timing or utilization. Economically related positions can become important even where the trading strategy produces an overall profit.

Section 1092 is a principal example. Where positions satisfy the statutory straddle requirements, the provision can defer an otherwise allowable loss to the extent of unrecognized gain in offsetting positions. The existence of YES and NO positions, or of two positions that offset one another economically, does not by itself establish that the statutory requirements have been met. The relationship among positions nevertheless becomes a material issue where the relevant statutory predicates are present.

Section 263(g) separately addresses certain interest and carrying charges allocable to personal property that is part of a straddle. Its application therefore concerns specified costs associated with the straddle rather than a general recharacterization of the underlying trading loss.

These provisions help explain why annual economic P&L and current taxable income can diverge. A profitable trading operation can contain losses whose tax use is deferred, and the period in which a position produces an economic result may not always be the period in which every related tax consequence is taken into account.

For the broader loss framework, see our analysis of prediction market loss deductions.

Fees, rebates, and liquidity-related payments

Professional market-making activity can also produce economically significant fees, rebates, credits, and incentive payments.

Kalshi’s public materials identify transaction fees and market-making or liquidity-related programs whose terms can differ by product and can change over time. For a professional participant, those amounts should be retained separately in the accounting records before their tax treatment is determined.

The platform’s description of an item as a fee, rebate, credit, reward, or incentive is relevant factual information, but it does not necessarily determine the item’s treatment under the Internal Revenue Code. The analysis depends on the legal and economic function of the amount and the tax framework applicable to the related transaction or activity.

This can become material in a high-volume trading book even when individual adjustments are small. Repeated transaction-level amounts can affect the reconciliation among gross trading economics, platform P&L, the general ledger, and taxable income.

A year-end process that has already netted materially different items together may therefore require additional reconstruction before the return treatment can be evaluated.

Why Kalshi transaction data is not the same as tax-ready accounting

Kalshi currently provides detailed participant data through its APIs. Its fill records include transaction identifiers, market identifiers, contract-side information, quantity, price, maker or taker status, fee data, timestamps, and subaccount information. Kalshi also separates older fills into historical endpoints.

Those records are valuable source data, but tax reporting can require a different organization of the information.

A professional trading firm’s tax records may need to establish the legal and beneficial owner of the activity, identify the contracts and positions to which the source records relate, preserve acquisition cost and other relevant economic adjustments, document material lifecycle events and corrections, identify positions remaining open at year-end, and reconcile the resulting treatment to the books and return.

Market-making activity makes that recordkeeping particularly important because reducing economic exposure does not necessarily establish what happened to an existing contractual position for federal tax purposes. The source records therefore need to preserve enough information to analyze the legally relevant event without embedding an unsupported tax conclusion into the accounting data.

The general ledger serves a different function. It can summarize cash, payroll, operating expenses, owner activity, and approved trading entries, but it ordinarily will not contain every position-level fact needed to reproduce the tax treatment of a high-volume contract population.

A supportable year-end process consequently requires a reproducible connection among the source transaction records, the tax-supporting accounting records, the general ledger, and the amounts ultimately reported on the return. The relevant level of detail will vary with the operation, but an aggregate P&L standing alone may not supply that chain.

Our prediction market accounting guide addresses the accounting and reconciliation problem in greater detail. Firms that need ongoing books and reconciliation can also review our prediction market accounting services.

Kalshi tax documents and year-end reporting

Information reporting should remain separate from the substantive tax analysis.

As of August 2026, Kalshi’s public tax documentation identifies Form 1099-INT for interest payments, Form 1099-MISC for certain credits and rewards, Form 1099-B for specified broker transactions involving crypto transfers, and Form 1099-DA for digital-asset transaction reporting through ZeroHash. Kalshi separately provides a downloadable Profit and Loss statement and states that its current P&L calculation uses FIFO and includes fees and rebates.

The public materials reviewed do not identify a Form 1099 specifically for standard event-contract trading activity. That is a statement about the public documentation reviewed, not a conclusion concerning the full scope of Kalshi’s federal reporting obligations or information furnished to governmental authorities.

Kalshi also expressly describes its P&L information as an informational tool rather than tax advice. The platform’s use of FIFO or another accounting convention therefore should not be treated as independently determining the federal tax treatment of a professional trading firm’s positions.

Transaction records, participant-facing tax documents, and substantive federal tax characterization serve different purposes. A professional year-end process should reconcile those sources without assuming that one supplies the legal answer to the others.

Entity and partnership considerations

Where professional prediction-market activity is conducted through an LLC or partnership, the entity adds another level of tax reporting after the underlying trading activity has been analyzed.

A partnership determines its items of income, gain, loss, deduction, and credit at the entity level before those items are allocated and reported to its partners. Depending on the particular facts, partner-level consequences can involve outside basis, at-risk limitations, passive-activity rules, the excess business loss limitation, self-employment and net investment income taxes, Section 199A, ownership changes, and state or local reporting.

Those downstream issues are not determined simply by the account’s annual P&L, and this article does not attempt to resolve them. Their significance is that weaknesses in the underlying transaction accounting can carry forward into the partnership return, partner statements, and individual filings.

Operations with changing ownership, service equity, significant distributions, or material losses can require additional entity and owner-level analysis apart from the classification of the prediction-market contracts themselves.

When return preparation is no longer the entire engagement

The level of tax work appropriate for a Kalshi participant depends on the materiality and complexity of the operation. An occasional participant with a limited number of transactions presents a different records and reporting problem from a professional firm operating automated strategies across a substantial book.

As volume and organizational complexity increase, several issues can become more consequential at the same time, including taxpayer capacity, contract classification, related-position analysis, fee and incentive accounting, entity reporting, year-end open positions, and reconciliation of platform data to the books. Prior-year reporting may add another layer if the methodology previously used does not correspond to the current legal or factual analysis.

In those circumstances, resolving the tax treatment for the first time during return preparation can create implementation problems. The underlying legal analysis must be capable of being applied to the actual records, while the accounting process must preserve the information needed to carry that treatment through the entity and owner-level filings.

Return preparation then becomes the final implementation stage of the analysis rather than a substitute for it.

What this means for professional Kalshi market makers

Professional market-making activity can materially affect federal tax analysis because it changes the taxpayer’s operating facts, the structure of the trading book, and the records needed to support the return. It can make business status, dealer questions, Sections 475 and 1256, loss limitations, economic adjustments, and entity reporting relevant without allowing any of those issues to be resolved merely from the market-maker label.

A sophisticated trading firm therefore needs to understand more than its annual economic profit. It must be able to identify the tax treatment applied to its material activity, support that treatment from the underlying transaction record, reconcile the resulting amounts to the books, and carry those amounts through the appropriate entity and owner-level returns.

For professional prediction-market participants, the legal analysis and the accounting record are ultimately interdependent. A position that is supportable as a matter of tax analysis still has to be capable of consistent implementation and substantiation from the taxpayer’s actual records.

How Camuso CPA works with professional prediction-market firms

Camuso CPA advises professional prediction-market traders, market makers, liquidity providers, and trading firms on federal tax and accounting issues arising from high-volume event-contract activity.

Where an operation has material trading volume, automated execution, complex position relationships, entity-level reporting, or unresolved federal tax questions, the engagement can begin with a coordinated review of the tax and accounting issues that must be resolved before the return position is implemented.

Request an Prediction Market Tax & Accounting Assessment

Frequently Asked Questions

Are Kalshi market makers automatically treated as a trade or business?

No categorical rule applies. Trade-or-business status depends on the taxpayer’s actual activities and the applicable facts and circumstances. Securities trader guidance identifies factors such as substantiality, continuity, regularity, holding periods, transaction activity, and time devoted to trading, but professional Kalshi activity must still be analyzed on its own facts.

Does formal Kalshi market-maker status make the taxpayer a dealer?

No. An exchange designation may be relevant evidence concerning the taxpayer’s activities, but dealer status is determined under the applicable statutory definition and requires analysis of the taxpayer’s role, relevant instruments, customer relationships, and other facts.

How should Section 475 be considered for a Kalshi market maker?

Market-making activity alone does not answer the Section 475 question. The provision contains its own taxpayer and instrument definitions, and those threshold requirements must be analyzed before its other consequences are considered. This article does not take a position on whether a particular Kalshi market maker or event contract satisfies those requirements.

Are Kalshi contracts automatically Section 1256 contracts?

No. Kalshi’s regulatory status can be relevant to one part of the statutory analysis, but the particular contract must independently satisfy the requirements of a Section 1256 category. Venue status alone does not determine the result.

Is Kalshi’s P&L statement sufficient for a professional market maker’s tax reporting?

The P&L can be a useful reconciliation source, but a professional operation may require additional information concerning ownership, basis, fees and incentives, position history, settlement and correction records, economically related positions, and year-end open positions. The applicable federal tax treatment may also require analysis that is not reflected in the platform calculation.

Does Kalshi issue a Form 1099 specifically for standard event-contract trading?

As of August 2026, the public Kalshi materials reviewed do not identify a Form 1099 specifically for standard event-contract trading activity. Kalshi separately identifies forms associated with certain interest, rewards, crypto-transfer broker transactions, and digital-asset activity and provides trading P&L information.

Do opposite YES and NO positions automatically create a Section 1092 straddle?

No. Economic offset can be relevant, but Section 1092 has statutory requirements that must be satisfied before the straddle rules apply. The existence of opposite positions does not determine the result by itself.

What records should a professional Kalshi market maker maintain for tax reporting?

The appropriate record set depends on the operation, but a professional firm may need source records sufficient to establish account ownership, transaction identity, acquisition cost and relevant adjustments, material position events, fees and incentives, year-end open positions, and reconciliation to the books and return. The required level of detail depends on the applicable tax treatment and the facts of the business.

When should a professional market maker address these issues?

For a material trading operation, the analysis is generally more manageable when classification, records, year-end positions, and entity-reporting questions are addressed before return preparation is substantially underway. The larger and more interconnected the trading book becomes, the more difficult those issues can be to reconstruct after year-end.