Capital Gain and loss, Robinhood and Kalshi

[GOTK]

I received a consolidated 1099 from Robinhood that reports my capital gains. I also had capital losses from trading on Kalshi and Robinhood.

How do I enter the Kalshi losses in TurboTax so they properly offset the capital gains reported on my Robinhood 1099 (I think there is a $3k cap on losses ..) ?

Also, is the Robinhood consolidated 1099 supposed to include losses from their prediction market trades, or are those reported separately? If they are not included, where and how should I enter those losses in TurboTax?

Thanks in advance for any guidance.

[DavidD66]

Platforms like Robinhood and Kalshi currently are not required to report prediction market transactions on Form 1099-B, or any other tax form.  They may issue you a statement with all of your prediction market activity, it is up to the taxpayer to track their gains and losses and keep documentation.

As for how to enter your prediction market transactions, there is no consensus on how to treat those gains and losses for tax purposes.  The IRS has not issued any guidance on the matter.  There is agreement that they need to be reported, but not on how to do it for tax purposes.  There are several possibilities:

• Treat them as a capital asset, like stocks and bonds, subject to rules regarding capital gains and losses.
• Treat them as gambling winnings or losses.
• Treat them as Section 1256 contracts.

You do need to report them but you will have to determine which method you should use.  Once the IRS issues guidance you might need to amend your tax return accordingly.  

[GOTK]

Thanks! Let’s say I treat them as gambling winning and losses. I know where to add gambling winnings and losses in Turbotax (other miscellaneous income), but it does not allow adding losses unless you add winnings. If there is only loss, no winnings, how do I add that? Can you help me with that? Also, let’s say I found how to do that, would Turbotax calculate/consider the loss against the Robinhood stock gains so I pay less tax on gains?

[CatinaT1]

I wouldn't suggest taking the position of treating them as gambling winnings and losses. Gambling losses can only be deducted if you itemize your deductions on Schedule A and you can only deduct losses up to the total amount of winnings you report. 

If you want it to properly calculate and consider the losses against the Robinhood stock gains, you would have to enter Kalshi in a similar manner as your Robinhood gains and losses.

[GOTK]

Got it. Do you know how I can add the losses from Robinhood predictions and Kalshi in TurboTax? Where do I add those and how. TurboTax did not ask about losses anywhere in the online version.

[DavidD66 · Accepted solution]

To enter your prediction market transactions as capital gains and losses you will enter them the same way you would transactions on 1099-B that you enter yourself (as opposed to importing).  

• Go to Wages & Income, Select Investments and Savings....
• Since you've already entered your 1099-B, click on the "Add Investments" box.
• On the page "Let's Import your tax info" click on "Enter a different way"
• Select "Other" on the OK let's start with one investment type
• When asked "Tell us more about this sale?" Give a description of the prediction market platform (e.g. Kalshi, Robinhood) Click Continue
• On the page "Now, enter one sale...":
• For "What type of investment did you sell?  Select "Other"
• Enter the date acquired and the date you closed the position or expiration date
• Your "winnings" will be proceeds.  Your cost basis will be what you lost.
• On the next page, click Continue, and your done

I've done some additional research and I believe that these transactions will end up having to be reported as Section 1256 transactions.  I say this due to the fact that the The Commodity Futures Trading Commission (CFTC) is claiming jurisdiction over prediction markets.  The CFTC is the primary federal agency that regulates the U.S. derivatives markets, including commodity futures, options, and swaps.  

If you want to report your prediction market transactions as 1256 Transaction:

• Go to "Less Common Investments and Savings"
• Next to "Contracts and Straddles" select "Start"
• Answer "Yes" to "Any Straddles or Section 1256 Contracts?"
• On the next screen, it is highly unlikely that you need to make any elections, so just click "Continue"
• On the screen with "Contracts and Straddles", more than likely you only need to select Section 1256 contracts...  You may want to read the IRS instructions for Form 6781, Gains and Losses from Section 1256 Contracts and Straddles
• Select "I'll report the totals from each broker or account.
• Enter the information to report your your profits and losses from your Section 1256 Options transactions.  

[Billjohn5]

I am using TurboTax full expert service and my tax expert (who previously never heard of prediction markets) is insisting that it goes under gambling losses. Any suggestions for me? @CatinaT1 @DavidD66 

[GOTK]

Thank you, David. Yes, I also did some research and seems like your second solution is the most straight forward and easier to do.

[DavidD66]

If I was reporting them on my tax return I would probably treat them as Section 1256 contracts  or perhaps capital assets (like stocks).  I would not treat them as gambling winnings/losses.  Another option I didin't mention in the previous post is to report net winnings as "Other Income" on Schedule 1 of Form 1040.   Kalshi, which I believe is the largest predictions market platform is already fully regulated by the CFTC and are operating as a registered Designated Contract Market.  I would guess Robinhood is too since they provide options trading.  States want them treated as gambling proceeds and losses so they can regulate and control them.  But the CFTC wants jurisdiction, and I'm guessing they will win that battle.  My rebuttal to someone that says they should be treated as gambling winnings and losses would be "show me the authoritative source!".   

[user17703603655]

Hey, how did you eventually report them if I may ask, I just recieve annual events contract statement, curious what to do?

[GOTK]

I reported as 1256 Transactions as a David suggested and only included total proceeds and total costs. No need to enter individual transactions. See David’s message with detailed instructions above.