1256 Contract - Tax Advantages

Tax Advantages

Any gain or loss from a 1256 Contract is treated for tax purposes as 40% short-term gain and 60% long-term gain. Typically the gain from any non-1256 contract will be taxed 100% at the short-term rate because the position is usually held for less than 12 months. Since most futures contracts are traded in a much shorter time frame than the 12 month rule required by the IRS for long term capital gains treatment, this creates an inherent tax disadvantage. Thus the 1256 Contract designation was created to enhance the after-tax attractiveness of these products.

Section 1256 contract net losses can be carried back 3 years (instead of being carried forward to the following year), but only to a year in which there is a net Section 1256 contracts gain, and only up to the extent of such gain (the carrying back cannot produce a net operating loss for the year). Tax reporting for Section 1256 contracts is significantly simpler than for stocks, options, and single-stock-futures.