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Futures Contracts

Futures contracts (Section 1256 contracts) are taxed differently than other securities. Regardless of your holding period, Section 1256 contracts are taxed as 60% at long term capital gains rates and 40% at short term capital gains rates. The maximum blended tax rate for futures gains works out to be 23% (60% X 15% maximum long term capital gains rate + 40% X 35% maximum short term capital gains rate). This compares very favorably to the maximum short term capital gains rate of 35%. Section 1256 contract gains and losses are reported on Form 6781 and carried over to Schedule D.

Losses on Section 1256 contracts are treated as capital losses and subject to the $3000 limitation. However, unlike other capital losses, you can elect to carry back Section 1256 losses up to 3 years! They can be used only against gains on Section 1256 contracts in previous years.

 

Coach says, "Because of the preferential tax treatment and special carry back provision of Section 1256 contracts, it is not advisable for PROFITABLE Futures traders to elect mark to market accounting."

If you have any further questions on Futures taxation, please fill in the box below to contact us.

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