FUTURES TAX TREATMENT (SECTION 1256)
Plain English
Futures get a unique tax advantage called the 60/40 rule. Regardless of whether you held for 1 day or 1 year, 60% of your gains are taxed at the lower long-term capital gains rate and 40% at the short-term rate. This significantly reduces the effective tax rate for active traders.
Going deeper
Section 1256 contracts (futures, broad-based index options, and foreign currency contracts) receive special tax treatment under IRS rules. The 60/40 rule: 60% of gains/losses are treated as long-term capital gains/losses (maximum 20% rate); 40% are treated as short-term capital gains/losses (up to 37%). This blended rate means even day traders on futures have a maximum effective rate of about 26.8% (vs. 37% for stock day traders). Additionally, Section 1256 contracts are marked-to-market at year-end — all open positions are treated as if sold at year-end value, simplifying tax reporting. Wash sale rules do NOT apply to futures (unlike stocks). Net Section 1256 losses can be carried back 3 years.
Examples
Tax Rate Comparison
A futures day trader makes $100,000 in profits. Tax: $60,000 taxed at 20% ($12,000) + $40,000 taxed at 37% ($14,800) = $26,800 total. Effective rate: 26.8%. A stock day trader making the same $100,000 pays $37,000 (37% short-term rate). Futures save $10,200 in taxes.
Loss Carryback
You have a terrible year trading futures — $50,000 net loss. In prior years you paid taxes on $80,000 of futures gains (3 years ago). You can carry back the $50,000 loss up to 3 years to offset prior gains and receive a refund. This loss carryback is unique to Section 1256 contracts.