fbpx Futures & Options Tax Considerations: Section 1256 Contracts | Option Strategist

Futures & Options Tax Considerations: Section 1256 Contracts

By Lawrence G. McMillan

Section 1256 trades include all futures trades, as well as futures options.  They also include option trades on cash-based indices ($OEX and $SPX, and especially $VIX), but not SPY or QQQ, for example, for the underlying there is an ETF, not cash.

A Section 1256 trade is treated as 60% long-term and 40% short-term, no matter if the position was held for one minute or one year.  Also, each Section 1256 contract held at the end of the year should be marked to market at year-end, and the resulting gain or loss reported as a gain or loss for that year.  

These should be itemized separately and reported on your Schedule D as one line in the short-term section and one line in the long-term section.  Hence, one needs to keep track of this unrealized portion from year to year, as it needs to be reversed out the next year.

For subscribers of The Option Strategist Newsletter, some of last year’s most profitable trades fell into this category – notably the Heating Oil – Gasoline spread (which used futures) and the S&P futures put ratio spreads (which is another reason to favor the S&P put ratio spread over the SPY put ratio spreads).

You should consult your tax advisor about this subject when preparing your year-end tax returns.

Share this

Option Strategist
Blog Search

Trading or investing whether on margin or otherwise carries a high level of risk, and may not be suitable for all persons. Leverage can work against you as well as for you. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. The possibility exists that you could sustain a loss of some or all of your initial investment or even more than your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and investing, and seek advice from an independent financial advisor if you have any doubts. Past performance is not necessarily indicative of future results.
Visit the Disclosure & Policies page for full website disclosures.