Section 1256 Contracts Tax Treatment
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Section 1256 Contracts: What They Are and How to Report
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Section 1256 contracts include certain regulated futures contracts, foreign currency contracts and non-equity options.
These contracts receive a unique tax treatment under the IRS code.
On December 31 of each year , all open contracts are treated as if they were sold at fair market value.
Gains and losses are split 60% long-term and 40% short-term, which can significantly reduce tax liabilities compared to traditional trading.
Section 1256 contracts have special tax rules, including the 60/40 tax treatment and mark-to-market accounting.
These contracts offer tax benefits but require filing Form 6781 and reporting gains or losses yearly , even if trades are still open.
Investors with frequent trades may find it helpful to work with a tax consultant for accuracy.
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