Today is tax day… and if you haven’t filled your federal and state taxes yet, do so now, or have the IRS knocking at your door. April is the time of year you’re forced to review your stock market gains and losses, compiling statements to find your cost basis and take a look at the taxes you owe. But for those of you who traded futures markets, this is one hurdle you don’t have to jump over.
Futures trading actually falls under a different part of the tax code than stock trading, with exchange traded futures and futures options trades being considered ‘Section 1256 Contracts’ come tax time. These 1256 Contracts have some distinct tax treatment, including:
Unlike stocks, futures based investments are based on their marked to market value at the end of the year, so any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. This is generally good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains – even though the trade was anything but long term.
In addition, futures based investments do not require the accounting of individual trades. This is a godsend for any of you who have spent hours searching through old brokerage statements from 4 years prior trying to find the cost basis for a certain stock. There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments.
Happy Tax Day everyone!
P.S. — Futures gains and losses should be reported on Form 6781 (http://www.irs.gov/pub/irs-pdf/f6781.pdf) for US citizens, which comes over onto Schedule D of Form 1040 on lines 4 and 11. Schedule D: http://www.irs.gov/pub/irs-pdf/f1040sd.pdf