Section 1256 Contracts: The 60/40 Tax Rule for Futures and Index Options

This article is general information about US tax rules, not tax advice. Check with a qualified tax professional before relying on it.

US tax law gives a group of instruments, called section 1256 contracts, a special treatment: gains and losses are split 60% long-term and 40% short-term, regardless of how long you held the position. For active traders who would otherwise have mostly short-term gains, this can make a meaningful difference.

What counts as a section 1256 contract

According to the IRS, section 1256 contracts include:

• Regulated futures contracts.
• Foreign currency contracts (meeting specific requirements).
• Nonequity options, which include options on broad-based stock indexes and options on futures.
• Dealer equity options and dealer securities futures contracts.

Options on individual stocks and narrow-based indexes generally are not section 1256 contracts. Many retail forex trades and CFDs are also treated differently. Check how each instrument you trade is classified.

The 60/40 rule

Net gains or losses on section 1256 contracts are treated as:

• 60% long-term capital gain or loss, and
• 40% short-term capital gain or loss.

Because long-term gains are often taxed at lower rates than short-term gains, the blended rate can be lower than if all gains were short-term. See capital gains basics.

Mark-to-market at year-end

Section 1256 contracts open at the end of the tax year are treated as if they were sold at fair market value on the last business day of the year. The resulting gain or loss counts for that year, and the basis is adjusted so it is not counted again later.

Reporting

Gains and losses are reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. Brokers usually report aggregate profit or loss on section 1256 contracts on Form 1099-B.

Loss carryback

Individuals may be able to elect to carry back a net section 1256 contracts loss to the three previous tax years, to offset section 1256 gains in those years. The Form 6781 instructions explain the conditions.

Keep your instruments separate

Because tax treatment differs by instrument, it helps to see your results by asset class: futures and index options in one group, stocks and single-stock options in another. TradeThink tracks asset classes separately, so you can filter results by stock, options, futures, forex, CFDs and crypto, and export each set. Related: futures trading basics.