Section 1256 contracts enjoy lower 60/40 capital gains tax rates, summary tax reporting, easier mark-to-market (MTM) accounting, and a Section 1256 loss carryback election.
Section 1256 contracts include:
- U.S. regulated futures contracts (RFCs) and options on U.S. RFCs
- U.S. broad-based indexes made up of 10 or more underlying securities, also known as stock index futures
- options on U.S. broad-based indexes
- foreign futures if granted Section 1256 treatment in an IRS revenue ruling (lists are online at https://greentradertax.com/tax-treatment-for-foreign-futures/)
- non-equity options (a catchall)
- CBOE-listed options on commodity ETF widely-held publicly traded partnerships (PTP)
- CBOE-listed options on precious metals ETF publicly traded trusts (PTT)
- CBOE-listed options on volatility ETN prepaid forward contracts
- forward forex contracts with the opt-out election into Section 1256(g) on the major pairs for which futures trade (we make a case for spot forex, too)
- forex OTC options (Wright court)
Section 1256 contracts have lower 60/40 capital gains tax rates: 60% (including day trades) are subject to lower long-term capital gains rates, and 40% are taxed as short-term capital gains using the ordinary rate. At the maximum tax bracket for 2023 and 2024, the blended 60/40 rate is 26.8% — 10.2%, lower than the highest regular bracket of 37%.
There are significant tax savings throughout the income brackets. The LTCG rate in the lowest two ordinary brackets is 0%.Regular state tax rates apply because they do not include a long-term rate.
Section 1256 contracts are marked-to-market (MTM) daily. For tax purposes, MTM reports both realized activity throughout the year and unrealized gains and losses on open trading positions at year-end.
Section 1256 tax rates vs. ordinary rates (2023 and 2024 rates)
| Ordinary Rates | Long-Term Capital Gains Rates | 40% Short-Term Rates | 60% Long-Term Rates | Blended 60/40 Rates | Savings In Rates |
| 10% | 0% | 4.0% | 0% | 4.0% | 6.0% |
| 12% | 0% | 4.8% | 0% | 4.8% | 7.2% |
| 22% | 15% | 8.8% | 9% | 17.8% | 4.2% |
| 24% | 15% | 9.6% | 9% | 18.6% | 5.4% |
| 32% | 15% | 12.8% | 9% | 21.8% | 10.2% |
| 35% | 15% | 14.0% | 9% | 23.0% | 12.0% |
| 37% | 20% | 14.8% | 12% | 26.8% | 10.2% |
For more information, seeGreen’sTraderTax Guide, Chapter 3, Tax Treatment of Financial Products.
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