The Section 1256 60/40 Tax Rule for Futures

How the 60/40 Split Works

Most futures traded on U.S. exchanges are Section 1256 contracts. That group includes regulated futures contracts, broad-based index options, and certain foreign currency contracts. At tax time, your net gain or loss on these contracts is split automatically: 60% gets the lower long-term capital gains rate, and 40% is taxed as short-term gain at your ordinary income rate.

The split applies even if you held a position for a single day. That is the main advantage over stock trading, where you must hold more than a year to earn long-term treatment. The same split works against you on losses, though: 60% of a Section 1256 loss is long-term, which can matter depending on the rest of your return.

Marked to Market at Year-End

Section 1256 contracts are marked to market every December 31. Any position still open at year-end is treated as if you closed it at the settlement price that day, and the unrealized gain or loss lands on that year's return. When you actually close the trade the following year, your cost basis is adjusted so you are not taxed twice.

This catches new futures traders off guard. A winner still open on New Year's Eve is taxable income for the year that is ending, even though you have not collected a dime. Plan for it, and consult a qualified tax professional about your specific situation.

Reporting and the Loss Carryback

Section 1256 results are reported on Form 6781, then flow to Schedule D. Your brokerage summarizes the year's activity on a 1099-B, and the mark-to-market accounting means most active futures traders do not need to track wash sales on these contracts.

60/40 split applies automatically to net Section 1256 results.
Year-end mark-to-market taxes open positions as if closed.
Three-year carryback is available on net Section 1256 losses by election, against prior Section 1256 gains.
No wash-sale rule for most Section 1256 contracts under current law.

One more practical point: the 60/40 blend lowers the effective federal rate on futures gains, but state income taxes and, for higher earners, the net investment income tax can still apply on top. Run the full picture with your preparer. This page is educational, not tax advice. Futures trading involves substantial risk of loss and is not suitable for all investors, and the tax side deserves the same care as the trading side. Consult a qualified tax professional.

Related Guides & Tools

How futures profits are taxed Your futures 1099-B, explained The mark-to-market election Futures account types Open an account

The Section 1256 60/40 Tax Rule for Futures — FAQ

Do all futures get 60/40 treatment?

Most regulated futures on U.S. exchanges do, along with broad-based index options. Single-stock futures and some other products are also included, but the exact scope is set by statute and can change, so confirm with a qualified tax professional.

What if I hold a futures position over New Year's?

It is marked to market on December 31 and the gain or loss is reported for that year, even though the trade is still open. Your basis adjusts going into the next year.

Can futures losses offset stock gains?

Net Section 1256 losses are capital losses and follow the usual capital loss rules on Schedule D. There is also a special election to carry a net Section 1256 loss back three years against prior Section 1256 gains. A tax professional can walk you through it.

Does the 60/40 rule apply to hedgers?

Genuine hedging transactions identified as such are generally taxed as ordinary income or loss, not under the 60/40 capital split. The identification rules are strict, so hedgers should work with a tax professional who knows commodity taxation.

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