The Ministry of Peshmerga Affairs said blood samples from about 35 fighters revealed traces of sulphur mustard.
It did not say if any of the peshmerga had died as a result of the attack, or how severely they had been wounded.
Mustard gas can burn skin and cause severe respiratory problems, and is banned under international law.
The exposure took place along the front lines near the northern Iraqi towns of Makhmour and Gwer, the ministry said in a statement.
Roughly 37 mortars were fired in the attack, the statement added, "releasing white smoke and a black liquid".
The ministry called on countries fighting IS to give peshmerga fighters equipment for protection against chemical attacks. Several countries including the United States are already giving military assistance to the Kurdish fighters.
This is not the first time IS has been accused of using chemical weapons. In March, Kurdish authorities in Iraq said they had evidence that IS had used chlorine gas.
That allegation, by the Kurdistan Region Security Council, followed similar claims that the group had used low-grade chemical weapons against Iraqi security forces.
The director of the Organisation for the Prohibition of Chemical Weapons expressed "serious concern" in August over the possibility IS was using prohibited chemical weapons.
The UN recently adopted a resolution aimed at identifying those behind chemical weapons attacks in Syria.
IS already has a large arsenal of conventional weapons and military vehicles seized from the Iraqi army, much of it produced by the United States.
Iraq Kurds were the victim of a major chemical weapons attack by the Iraqi military under Saddam Hussein in 1988, which left thousands dead in the city of Halabja.

Cook, 25, scored 25 goals in the National League last season, helping the Bluebirds to a mid-table finish.
He returned to Holker Street after a stint at Grimsby in July 2014.
"The lad wants to play League football and I can't and won't have a go at players who want to play at a higher level," Cox told BBC Radio Cumbria.
"There are clubs at our level who have come in for him, but his agent has categorically said he doesn't want to sign for another Conference club.
"It's one we might need to be patient on."

Using a pseudonym of His Royal Gingerness (HRG), the hacker told the BBC he wanted to highlight the website's "vulnerability".
It only took him a few minutes to hack into the site, he said.
Norwich International Airport director Richard Pace condemned the hacking as a crime that police were investigating.
HRG pointed out that while he made his attack to see if he could gain access, a more maliciously-minded intruder could have done damage.
He claimed he knew of someone who had planned to plant a bomb hoax in the system over Christmas, but said he was able to prevent that from happening.
While Mr Pace said the information website was not linked to the airport's operations system, he acknowledged that removing it was a serious inconvenience to passengers.
He admitted malicious hackers could have planted a bomb hoax on the site.
The airport's operations director promised a robust replacement site - with more secure protocols and systems - would be operational within weeks.
In the meantime, passengers can get information by calling 01603 411923.
HRG, who asked not to be identified because he fears prosecution, said he hacked the site "to see if I could".
"I found I could do it and then contacted the airport to let them know," he said.
"It took me between two to three minutes to do this. I do this mostly to see what vulnerability there are in modern systems."
Islamic State (IS) militants fired mortar rounds containing mustard agent at Kurdish peshmerga fighters in northern Iraq, Kurdish officials say.
[NEXT_CONCEPT]
Barrow want to retain Andy Cook but expect the striker to explore opportunities in the Football League, says manager Paul Cox.
[NEXT_CONCEPT]
An airport has taken down its passenger information website after a hacker breached security systems, claiming they were too lax.