FUTURES & SECTION 1256 CONTRACTS
UNDERSTANDING THE TAX TREATMENT OF CERTAIN FUTURES AND LISTED OPTIONS
FUTURES & SECTION 1256 CONTRACTS
UNDERSTANDING THE TAX TREATMENT OF CERTAIN FUTURES AND LISTED OPTIONS
Last Updated: February 2026
Futures trading often involves a different set of tax rules than stock and equity option trading. Under Internal Revenue Code Section 1256, certain contracts receive special tax treatment, including mark-to-market accounting and a blended long-term/short-term capital gains rate.
Regulated futures contracts are the most common example, but Section 1256 can also apply to certain listed non-equity options and other qualifying contracts. Importantly, qualification depends on the type of contract, not simply the ticker symbol or underlying product.
CONTENTS
You may not need every section below; most traders focus on the areas relevant to how they trade.
WHAT ARE FUTURES CONTRACTS?
Futures are a form of derivative contract for buying or selling a given asset at a fixed price on a future date (the expiration), no matter the market price on that date. The asset could be a specific commodity or a security. Futures contracts are standardized for trading on an exchange – such as the CME Group. You’ll need a brokerage account approved for trading futures.
Futures can be used for either hedging or speculating.
Hedging futures involves buying or selling with intentions to actually receive or deliver the underlying commodity. Companies or institutional investors may use futures in this way to help manage risk and prevent losses to their operations or investment portfolio.
Speculating futures is perhaps the most common use by individual traders and investors. Because futures can be bought and sold up to the time of expiration, traders can buy and sell futures to profit from the direction of the market. The trader has no intention of owning the underlying asset, and so, before expiration, they will typically buy or sell an offsetting position to eliminate their obligations.
Types of Futures
Futures as a class can refer to a number of types of futures contracts available for trading, such as…
- Commodity futures – like oil, corn, or wheat
- Precious metal futures – like gold or silver
- Index futures – like the S&P 500 or Russell 2000
- Currency futures – like the Euro, Pound, or CME Bitcoin
- U.S. Treasury Futures – like 2-year and 5-year T-Notes
Options on Futures
Traders can also take advantage of options on futures in order to diversify, hedge other positions, or perhaps trade in the futures markets at less cost.
Options on futures are typically much like equity options, allowing the holder rights to buy or sell a specific futures contract at a given strike price on or before the expiration date. Traders often use the same strategies as well. However, most options on futures are cash-settled, and also tend to be European-style – meaning they cannot be exercised early.
How Futures are Taxed
Futures are typically taxed as Section 1256 contracts, including year-end mark-to-market treatment for any open positions.
A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price.
If the contract is a regulated futures contract, the rules described earlier under Section 1256 Contracts Marked to Market apply to it.
The termination of a commodity futures contract generally results in capital gain or loss unless the contract is a hedging transaction.
WHAT IS A SECTION 1256 CONTRACT?
A section 1256 contract is any:
- Regulated futures contract,
- Foreign currency contract,
- Nonequity option,
- Dealer equity option, or
- Dealer securities futures contract.
Note: The special tax treatment depends on the contract classification (for example, regulated futures vs. equity options vs. non-equity options), not on a specific ticker list.
Wondering what a nonequity option is?
This is any listed option (defined later) that is not an equity option. Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor’s 500 index).
Nonequity options are something of a catchall category, with definite benefits for many traders. This category includes broad-based index options, as well as many ETF options for commodity, precious metal, and volatility ETFs. See ETF and Broad-Based Index Options
Benefits of Section 1256 Treatment
The good news for traders of Section 1256 contracts is twofold:
- 60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. This results in more favorable tax treatment for 60% of your gains.
- A special loss carry-back election is allowed. Section 1256 contract net losses can be carried back 3 years instead of being carried forward to the following year. These losses can only be carried back to a year in which there is a net Section 1256 contracts gain, and only to the extent of such gain, and cannot increase or produce a net operating loss for the year. The loss is carried back to the earliest carry-back year first and any unabsorbed loss can then be carried to each of the next two years. If you have a net loss for the year you can amend a previous year’s tax return and possibly get a refund!
Section 1256 contracts are reported on IRS Form 6781. Part I, Line 2 of this form simply asks for your total gain or loss, and then it splits this loss as 40% short-term on Line 8 and 60% long-term on Line 9. These entries then flow to your Schedule D – Part I, Line 4 for short-term capital gains and Part II, Line 11 for long-term capital gains.
No additional detail or complex matched trade report (as required for capital gains from stocks, options, etc.) is required.
Important: Broker 1099-B reporting may not consistently identify or segregate all contracts that receive Section 1256 treatment (especially certain index options or exchange-traded product options). TradeLog can help apply consistent classification and reporting across accounts.
Section 1256 Contracts are Marked-to-Market
This year-end mark-to-market rule is one reason Section 1256 reporting is often simpler than detailed trade-by-trade reporting for securities.
Section 1256 contracts are marked-to-market, meaning any positions held open at year-end are marked as closed at fair market value. The unrealized gain or loss is then reported in the tax year reporting. On January 1 of the following year, those positions are marked as open at the same year-end price.
Traders who elect Section 475 Trader Tax Status often make the election only for securities, allowing them to retain the preferred 60/40 capital gains tax rates on their Section 1256 contracts.
BENEFITS OF USING TRADELOG SOFTWARE
TradeLog imports futures trades from select brokers, handles necessary year-end mark-to-market adjustments and generates necessary totals for Form 6781 reporting. Although brokers often report totals for futures trading on 1099-B, they may not consistently identify and segregate certain index options or other non-equity options that may qualify for Section 1256 reporting.
For details on how ETF and ETN structure can affect taxation and reporting, see our ETFs and ETNs guide.
Some options traders may find brokers differ on classification of Section 1256 qualified index options – while one broker may treat as a Section 1256 contract, another broker may not. TradeLog allows traders to take control of their Broad-Based Index Options Settings, applying consistent tax treatment across all accounts.