Section 1256 contracts and the 60/40 split

Education, not tax advice: rules, rates and thresholds change every year, so confirm anything you plan to act on with a qualified tax professional.

Futures traders and index options traders live under a different set of rules from stock traders, and for once the different rules are mostly simpler. Section 1256 of the tax code creates its own category of instrument with its own character, its own year-end treatment and no wash sales.

What is a Section 1256 contract

The statute lists:

• Regulated futures contracts: anything traded on a US exchange (CME, CBOT, ICE US) and certain qualified foreign exchanges. ES, NQ, CL, GC, ZB, 6E, the micro versions, all of them.
• Foreign currency contracts of the forward type traded in the interbank market (retail spot forex has its own rules; Module 4).
• Nonequity options: options on futures, and options on broad-based stock indexes such as SPX, NDX, RUT, VIX and their weekly and mini versions. Cash-settled, European-style index options are the classic case.
• Dealer equity options and dealer securities futures contracts (only for registered dealers).

What is not a 1256 contract, because it trips people constantly:

• Options on individual stocks.
• Options on ETFs, even ETFs that track a broad index. SPY options are equity options; SPX options are 1256. Same index, different tax treatment.
• Single-stock futures.
• Crypto spot and most crypto perpetuals on offshore venues. Exchange-listed crypto futures on the CME are regulated futures and do qualify.

The 60/40 rule

Gains and losses on 1256 contracts are treated as 60% long-term and 40% short-term regardless of holding period. A three-second scalp on ES gets 60% long-term treatment. There is no other place in the code that gives a day trader long-term rates.

Worked example. A futures trader nets $50,000 for the year. Illustrative rates: 24% ordinary, 15% long-term.

The blended rate under 60/40 is 0.6 × 15% + 0.4 × 24% = 18.6%, versus 24%. On $50,000 that is $2,700 kept, before state tax (most states do not honor the split; they tax the whole amount at ordinary rates). At higher brackets the gap widens: with a 37% ordinary rate and 20% long-term, the blend is 26.8% against 37%.

Losses get the same character: 60% long-term loss, 40% short-term loss, which then net against other capital gains and losses in the usual order.

Reporting: Form 6781

1256 contracts do not go on Form 8949 line by line. The broker reports an aggregate profit or loss for the year, and it goes on Form 6781, which splits it 60/40 and sends the two pieces to Schedule D. For a pure futures trader with one broker, the entire year's reporting can be a handful of numbers.

Three-year loss carryback

A net 1256 loss can, by election on Form 6781, be carried back three years to offset net 1256 gains from those years, generating a refund. Only 1256 gains in the prior years qualify, and the carryback cannot create or increase a net operating loss. It is an unusual privilege; ordinary capital losses can only be carried forward.

Example. 2024: +$20,000 1256 gain, tax paid. 2025: −$25,000 1256 loss. The trader can carry $20,000 back to 2024 and file for a refund of the tax paid on that gain, then carry the remaining $5,000 forward as a capital loss. Or, if the trader expects large gains next year, skip the carryback and carry the whole amount forward. A trade-off, not a rule.

No wash sales

The wash sale rule does not apply to 1256 contracts. Sell ES at a loss and buy it back one second later; the loss stands. This is the reason some active traders express an index view through futures or SPX options rather than SPY shares, though execution costs, contract size and margin matter more to that decision than tax.

Key idea: Regulated futures and broad-index options are Section 1256 contracts: 60% long-term and 40% short-term regardless of holding period, reported in aggregate on Form 6781, with a three-year loss carryback and no wash sale rule.

Distinguishing look-alikes

Try it: List every instrument you traded in the last three months and sort it into the table above. If you have both 1256 and non-1256 versions of the same exposure (SPX and SPY, for instance), note the tax difference next to the execution-cost difference so the choice is deliberate.

Recap

• Section 1256 covers regulated futures, options on futures, and broad-based index options; not stock options, ETF options or spot crypto.
• Gains and losses are 60% long-term / 40% short-term regardless of holding period.
• The blend at illustrative rates of 24%/15% is 18.6% versus 24% for all-short-term.
• Reported in aggregate on Form 6781; net losses can be carried back three years against prior 1256 gains.
• No wash sale rule applies.