§1256 Contracts

Section 1256 of the IRC provides special tax treatment for certain financial contracts.

What Qualifies

• Regulated futures contracts (commodity and financial futures)
• Foreign currency contracts
• Broad-based index options (SPX, XSP, NDX, RUT)
• Non-equity options on broad-based indices

Does NOT include: individual stock options, narrow-based indices, or ETF options.

60/40 Rule

Regardless of actual holding period:

• 60% of gains/losses treated as long-term
• 40% of gains/losses treated as short-term

Blended Tax Rate

For a taxpayer in the 37% bracket:

60% × 20% (LTCG) + 40% × 37% (STCG) = 12% + 14.8% = 26.8% blended
vs. 37% if treated as ordinary income

Key Advantages

• Mark-to-market — all positions marked at year-end (no deferral)
• Losses reported on Schedule D — offset capital gains without itemizing
• 3-year loss carryback available (unique to §1256)
• No wash sale rule for §1256 contracts

Sources

• 26 U.S.C. §1256 – Section 1256 Contracts Marked to Market
• IRS Form 6781 – Gains and Losses from §1256 Contracts and Straddles
• IRS Publication 550 – §1256 Contracts