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Section 1256: The 60/40 Futures Tax Rule

Michael Whitman Michael Whitman · Trading since 2017, full-time since 2020 · Published 2026-09-26

A section 1256 contract is a regulated futures contract, foreign currency contract, nonequity option, dealer equity option or dealer securities futures contract. One still open at year end is counted as if sold, and its gain or loss is split 60% long-term and 40% short-term, however long it was held.

A section 1256 contract is a type of exchange-traded or interbank contract that US tax law treats differently from a share of stock: it is valued at year end, and its gain or loss is split 60/40 between long-term and short-term. US traders of futures and broad-based index options meet it on Form 6781.

This page sets out what 26 U.S.C. 1256 and the IRS actually say, as read on 26 September 2026. It is general information about how the rule is written, and tax situations differ. Before filing, check the current IRS instructions for Form 6781, which change from year to year.

How it works

Three rules do almost all of the work. Subsection (a) of the statute says:

  1. Year-end mark. Each section 1256 contract you hold at the close of the tax year is treated as sold for its fair market value on the last business day of that year, and the gain or loss counts in that year.
  2. Later adjustment. When you do close the position, the gain or loss already counted is taken out, so the same dollar is not taxed twice.
  3. The 60/40 split. Any gain or loss on a section 1256 contract is treated as 40% short-term and 60% long-term capital gain or loss.

The same treatment applies when a contract ends during the year, whether it is offset, delivered, exercised, assigned or left to lapse. Publication 550 adds the plain point that the split holds “regardless of how long you actually held the property.”

Reporting runs through Form 6781, Part I. Publication 550 says a trader who disposed of regulated futures or foreign currency contracts should receive Form 1099-B from the broker, and the form’s instructions say to enter the amount from its box 11 on line 1. The form then multiplies the net figure by 40% on line 8 and by 60% on line 9, and those two amounts go to Schedule D.

What counts, and what does not

The statute names five kinds of contract. Each has its own definition in subsection (g):

The exclusions matter as much as the list. An equity option is any option to buy or sell stock, or one valued by reference to a stock or a narrow-based security index. So an ordinary listed option on a single company, held by a trader who is not an options dealer, is not a section 1256 contract. Securities futures contracts and options on them are out unless they are the dealer kind. Interest rate, currency, basis, commodity, equity, equity index and credit default swaps, interest rate caps and floors, and similar agreements are all out as well.

Hedges are carved out too. The year-end mark does not apply to a hedging transaction, which the statute ties to the business-hedge definition in section 1221: roughly, a trade made in the normal course of a business to manage price, currency or interest rate risk, and clearly identified as a hedge before the close of the day it was entered into. Form 6781’s instructions add that the gain or loss on a hedging transaction is ordinary income or loss, so it gets no 60/40 split. The trader mark-to-market election discussed on the trader tax status page is a separate matter from this section.

A worked example

All figures here are hypothetical round numbers, chosen to show the arithmetic, not taken from any account or tax year.

The split. Suppose a trader has a net gain of $10,000 on regulated futures for the year. Under the 60/40 rule, $6,000 is treated as long-term capital gain and $4,000 as short-term. By comparison, Publication 550 treats a stock held one year or less as short-term, so a gain of $10,000 on shares bought in March and sold in June would be short-term in full.

Horizontal bars for a hypothetical gain of $10,000, one bar entirely short-term for a stock held under a year and one bar split into $6,000 long-term and $4,000 short-term for section 1256 contracts.
Worked example with hypothetical figures: a gain of $10,000 on shares held one year or less is all short-term, while the same gain on section 1256 contracts is split $6,000 long-term and $4,000 short-term.

Why the label matters. Publication 550 says the rates on a net capital gain, which comes from the long-term side, are generally lower than the rates on other income. The rates themselves depend on the tax year and the filer’s whole return, so none are applied here.

The year-end mark. Now suppose one position is still open on the last business day of the year and is worth $3,000 more than it cost. That $3,000 counts in year one, split $1,800 long-term and $1,200 short-term, even though nothing was sold. In February of year two the position is closed for a total gain of $2,000. Year one already counted $3,000, so year two records a $1,000 loss: $600 long-term and $400 short-term.

Table of one hypothetical futures position over two tax years, showing $3,000 counted in year one when it is marked at year end and a $1,000 loss counted in year two when it is closed, each split into long-term and short-term parts.
Worked example with hypothetical figures: one position marked at year end for $3,000 and closed next February for a total of $2,000, with each year's result split 60/40.

Across both years the total is the true gain of $2,000. What moved is the timing: $3,000 was taxable in a year when the trader still held the contract.

The loss carryback election

A loss year has an extra option. An individual with a net section 1256 contracts loss can elect to carry it back three years instead of only forward. Corporations, estates and trusts cannot make this election, according to the Form 6781 instructions.

The limits are tight:

A hypothetical case: a $5,000 net section 1256 contracts loss, where the earliest carryback year had $2,000 of net section 1256 contracts gain under that definition. That year absorbs $2,000, treated as $1,200 long-term and $800 short-term loss. The other $3,000 moves to the next carryback year under the same limit, and anything still unused carries forward under the usual capital loss rules. The election is made by checking box D on Form 6781, then filing Form 1045 or an amended return for the earlier year.

Forex and section 988

Currency trading has a second statute. Under 26 U.S.C. 988, foreign currency gain or loss from a section 988 transaction is ordinary income or loss by default. Section 988(a)(1)(B) lets a taxpayer elect capital treatment for a forward contract, futures contract or option that is a capital asset and not part of a straddle, but the election must be made and the transaction identified before the close of the day it is entered into.

Section 988(c)(1)(D) keeps regulated futures and nonequity options that would be marked under section 1256 out of section 988’s forward, futures and option rules, though a taxpayer can elect out of that exception, and the election then covers later years unless the IRS consents to revoke it. The Form 6781 instructions also say that if the section 988(a)(1)(B) election is made, section 1256 contracts that are also section 988 transactions are reported on Form 6781, with a list of the contracts attached. Whether a given retail forex account’s positions meet the three-part foreign currency contract test above is a question this page does not settle.

The original data

The rule is rarely the subject of a trading video. In a study of 24,971 trading videos, 53 titles pair “tax” with trading, trader, day trade, forex, option, futures or prop firm, plurals included. They come from 39 channels and have a median of 18,779 views, against 10,684 for the whole study.

Only 2 of those 53 titles name section 1256 or the 60/40 rule, which is 3.8%. They drew 959 and 604 views, and 46 of the 53 trading-tax videos had more views than the better of those two.

Futures content is common; futures tax content is not. The study has 593 videos with “futures” in the title, from 358 channels, at a median of 5,594 views. Only 2 of them, 0.3%, also mention tax, and they are the same two section 1256 videos. By contrast, 23 titles pair day trading or day trader with tax, at a median of 48,003 views.

So a viewer looking for trading-tax videos mostly finds titles about day trading, prop firms and forex, and titles that name the futures rule are rare. The group counts are published as a CSV of the title groups, with the exact title match used for each. Counts are whole-word title matches, one per video.

When it fails

It fails when the contract does not qualify. A single-stock option or a securities futures contract held by a non-dealer, or a swap, gets none of this treatment, even in the same account as qualifying futures.

It fails on timing. The year-end mark taxes gains on positions that are still open, and those gains can disappear before the position is closed, as the worked example shows. Year one is figured on the mark, not on the eventual result, and the difference only comes back in the year the position closes.

It fails for hedges and ordinary income. A properly identified business hedge is not marked and its result is ordinary, and the statute says the 60/40 split does not apply to any gain or loss that would otherwise be ordinary.

It cuts both ways on losses. A loss is split 60/40 as well, so 60% of it is a long-term loss. The carryback helps only if the three earlier years had net section 1256 contracts gain to absorb it.

Some familiar rules change shape. The statute says the wash-sale rule does not apply to a loss counted by the year-end mark. A section 1256 contract that is part of a mixed straddle, paired with a position that is not a section 1256 contract, has its own elections (boxes A to C of Form 6781) and its own reporting rules, and Part II of the form handles straddle gains and losses.

And the paperwork is dated. This page reads the 2025 Form 6781 and Publication 550 for 2025 returns. The IRS says to check its Form 6781 page for later changes, and nothing here replaces the instructions for the year being filed.

The futures page explains the contracts this rule taxes most often, and micro futures covers the smaller sizes many retail traders start with. Capital gains tax explains what the long-term and short-term labels mean, and taxes on trading covers the wider picture of when trading gains are taxed. Hedging explains hedging in general; the tax exception above covers only business hedges identified on the day they are made.

What I actually do

Check which contracts in the account actually qualify before counting on the 60/40 split. I would read the broker’s box 11 figure next to my own list of open positions on the last business day, because that list is what the year-end rule taxes.

— Michael Whitman

This page is educational, not financial advice. Test every idea on your own charts before risking money.