Broad-Based Index OptionsIf you trade index options, or other non-equity options such as on bonds, commodities or currencies, the results of a sale are treated differently. For example, options on the SPX, OEX, and NDX are not directly or indirectly related to a specific equity (stock), but are exchange-traded options of index stocks. These are subject to the provisions of IRS Code Section 1256, which states that any gains or losses from the sale of these securities are subject to the 60/40 rule (60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held). Non-equity options are usually reported on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). Please see our Boad-Based Index Options user guide page for a complete list of index options marked by TradeLog as section 1256 contracts. TradeLog also allows users to define additional securities as broad-based index options in the Global Options settings. There have been many conflicting opinions as to whether QQQQ, DIA, and SPY options should be treated as section 1256 contracts or not. Since these do not settle in cash, as do most section 1256 contracts, some suggest that these are not section 1256 contracts. Others feel that they meet the definition a a "broad-based" index option and therefore can be treated as section 1256 contracts. The IRS is not clear on on this, so we defer to the tax professionals, such as Robert A. Green, CPA. On his www.GreenTraderTax.com web site, under the Securities vs. Commodities topic, Green defines these as securities, and not section 1256 contracts. See: Securities vs Commodities under the sub-heading "Securities traders pay higher taxes." As always it is best to contact your tax professional for advice before arbitrarily categorizing your index options trades.
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. |