Good news for active traders:
The good news for traders of Section 1256 contracts is threefold:
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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. What this means is a more favorable tax treatment of 60% of your
gains.
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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. So if you have a net loss
for the year, you can amend a previous year's tax return and possibly get a
refund!
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Your broker marks all of your open positions to market and reports the
total gain or loss on a 1099. The gain or loss and the 60/40 split from these contracts are reported on
IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles).
Part I, Line 2 of this form simply asks for your broker-provided
1099 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 stock, options, and
single-stock-futures) is required.
Return to Tax Topics Main Page
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. makes no investment recommendations and does not provide financial, tax or legal advice. Please consult your tax advisor or accountant to discuss your specific situation. You are solely responsible for your investment and tax reporting decisions, and you should carefully evaluate all information delivered to you by Armen Computing Ltd. and TradeLog. Not all information may be appropriate for all investors.
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