A 1256 Contract is a term used by the Internal Revenue Service to denote any regulated futures contracts, foreign currency contracts, non-equity options (broad-based stock index options (including cash-settled ones), debt options, commodity futures options, and currency options), dealer equity options, dealer security futures contracts, and cash settled options (including euro-style index options). They are marked to market at the end of the tax year and treated as dispositioned (i.e., "closed").
IRS is not clear on whether QQQ, DIA and SPY options should be treated as section 1256 contracts. On one hand, these do not settle in cash (most Section 1256 contracts do), but on the other hand they meet the definition of a "broad-based" index option.
Read more about 1256 Contract: Tax Advantages
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