Futures Tax Treatment: Section 1256, 60/40 Split, and Mark-to-Market

Futures contracts that qualify under Section 1256 of the Internal Revenue Code are taxed under a blended rule: every net gain or loss is treated as 60% long-term and 40% short-term, no matter how briefly you held the position. That split comes with mandatory mark-to-market accounting at year-end and produces a top federal rate of roughly 26.8% for the highest earners, compared with 37% on an equivalent short-term stock trade.¹²

Which Futures Contracts Qualify

The 60/40 rule reaches you through the “regulated futures contract” category of Section 1256. A contract qualifies only if it trades on a national securities exchange registered with the SEC, a domestic board of trade designated as a contract market by the CFTC, or another market Treasury has approved.¹ In practice that covers the major U.S. exchanges (CME, CBOT, NYMEX, COMEX) and their listed products. If you trade E-mini S&P 500 futures, crude oil futures, corn futures, or Treasury bond futures on those venues, you are inside the rule automatically.

Mark-to-Market at Year-End

Section 1256 requires mark-to-market accounting on every qualifying contract. At year-end, each open position is treated as if you sold it at the closing price on the last business day of the tax year, and any gain or loss from that deemed sale is taxable in the current year whether or not you actually closed the trade.¹

You cannot defer profits by keeping a winner open past December 31. Your broker handles the valuation using exchange settlement prices and reports a single net result on your 1099-B. When you eventually close the contract, your starting basis is the year-end price used for the deemed sale, so you only recognize gain or loss accrued after that date.

The rule cuts the other way too. A deeply underwater position at year-end produces an immediate deductible loss without your having to actually close it. Stock traders have to sell to claim the loss; futures traders get it automatically.

How the 60/40 Split Cuts Your Tax

Once mark-to-market runs, your broker nets all realized trades and unrealized year-end positions into one aggregate figure. The 60/40 rule then splits that number: 60% is long-term capital gain or loss, 40% is short-term.¹ The holding period of any individual contract is irrelevant. A trade opened and closed in one afternoon gets the same treatment as one held six months.

The 40% short-term portion is taxed at your ordinary income rate, topping out at 37% for single filers with taxable income above $640,600 in 2026.² The 60% long-term portion is taxed at the preferential capital gains rates of 0%, 15%, or 20% depending on total taxable income.³ For 2026, single filers reach the 15% capital gains bracket at $49,450 and the 20% bracket at $545,500.⁴

Worked Example

Say you net $10,000 from trading E-mini S&P 500 futures during the year, and your other income puts you in the top ordinary bracket. Treated as ordinary short-term gain, the full $10,000 would be taxed at 37% for $3,700 of federal tax. Under Section 1256:

Long-term portion (60%): $6,000 taxed at 20% = $1,200
Short-term portion (40%): $4,000 taxed at 37% = $1,480
Total federal tax: $2,680, an effective rate of 26.8%

That is $1,020 saved on $10,000 of gains. Scale it to $100,000 and the advantage exceeds $10,000 in reduced federal tax.

The 3.8% Net Investment Income Tax

Higher earners owe an additional 3.8% Net Investment Income Tax on the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).⁵ Section 1256 gains count as investment income for this purpose.

For the top-bracket trader in the example above, layering NIIT on top brings the effective maximum rate from 26.8% to 30.6%. That still beats the 40.8% combined rate (37% plus 3.8%) that would apply to a short-term stock gain, but the gap is smaller than many traders expect. The NIIT thresholds are fixed by statute with no inflation adjustment, so more taxpayers cross them every year.

No Wash Sale Rule

The wash sale rule that trips up stock traders does not apply to Section 1256 contracts. If you sell a futures position at a loss and reopen the same contract immediately, the loss stands.⁶ Traders managing positions around year-end can harvest losses without the 30-day timing dance that stock traders have to perform.

Three-Year Loss Carryback

A net Section 1256 loss for the year opens an option no other individual asset class offers: you can carry the loss back up to three years to offset prior Section 1256 gains and claim a refund on taxes already paid.⁷

The limits are important. The carryback only offsets net Section 1256 gains from prior years, not gains from stocks, real estate, or other assets.⁷ The carried amount keeps its 60/40 character, and you apply it to the earliest eligible year first. Anything left over after three years of prior Section 1256 gains carries forward under the ordinary capital loss rules. A $50,000 loss in 2026 could pull cash back from taxes paid on 2023, 2024, or 2025 futures gains while you rebuild.

Reporting Section 1256 Contracts on Your Return

Your broker does most of the work. At tax time, your Form 1099-B reports the aggregate profit or loss from all your Section 1256 contracts in Box 11.⁸ That figure already reflects the mark-to-market adjustment on positions open at year-end and nets realized gains against realized losses.

You carry that Box 11 figure onto Line 1 of IRS Form 6781, “Gains and Losses From Section 1256 Contracts and Straddles.” The form runs the 60/40 split for you: Line 8 calculates the 40% short-term amount, Line 9 calculates the 60% long-term amount.⁹ Those two numbers then flow to Schedule D of Form 1040: the short-term amount to Line 4, the long-term amount to Line 11. Unlike stock trading, where you might report dozens of individual transactions, Section 1256 reporting condenses everything into one net figure split two ways.

Most brokers factor commissions and exchange fees into the Box 11 number rather than itemizing them separately. Reconcile the 1099-B against your account statements to confirm this, especially if your broker breaks fees out on trade confirmations.

What Falls Outside Section 1256

Custom forward contracts negotiated off-exchange, certain over-the-counter foreign currency contracts, and interest rate swaps, currency swaps, and credit default swaps are all explicitly excluded from Section 1256.⁹ These contracts revert to the standard capital gains rules: your holding period determines short-term or long-term treatment, mark-to-market does not apply, and gain or loss is recognized only when you close the position. You lose the automatic 60/40 benefit and the wash sale exemption, and each trade goes onto Schedule D or Form 8949 with individual dates and basis.

Crypto Futures Versus Spot Crypto

Bitcoin futures on the CME qualify as regulated futures contracts because the CME is a CFTC-designated contract market and the contracts are marked to market daily. CME Micro Bitcoin futures and CME Ether futures qualify on the same basis. All get the full 60/40 treatment, mark-to-market accounting, and the wash sale exemption.

Spot cryptocurrency is different. Buying and selling Bitcoin or Ethereum directly on a crypto exchange does not produce a Section 1256 contract, and those gains follow the standard capital gains rules with the holding period controlling. Crypto futures on offshore or unregulated platforms fail the qualified exchange requirement and also do not qualify. A Bitcoin day-trader using CME futures pays a maximum blended rate of about 26.8%; one trading spot Bitcoin on a crypto exchange could pay 37% on every gain held less than a year.

The Section 475(f) Election Trap for Commodity Traders

Active traders sometimes elect mark-to-market treatment under Section 475(f) to convert gains and losses to ordinary income. For securities traders, the 475(f)(1) election leaves Section 1256 contracts alone because the statute carves them out. For commodity traders, the 475(f)(2) election has no similar carve-out. Elect it and your Section 1256 contract gains become ordinary income at rates up to 37%, and the 60/40 benefit is gone.

The trade-off is that ordinary losses are fully deductible against other income, escaping the $3,000 annual cap on net capital losses. A commodity trader anticipating large losses in a specific year might prefer that. The election is irrevocable, though, and most futures traders come out ahead sticking with the default 60/40 treatment.

State Taxes

The 60/40 split is a federal rule only. Some states adopt the federal characterization and apply their own long-term and short-term rates to the split. Others tax all income at a single rate, making the split irrelevant at the state level. A handful of states have no income tax at all, giving traders there the cleanest benefit from the federal rule. Check your state’s treatment before assuming the federal savings carries through to your total tax bill.

1
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
2
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
6
Office of the Law Revision Counsel. 26 US Code 1256 – Section 1256 Contracts Marked to Market
7
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
8
Internal Revenue Service. Instructions for Form 1099-B (2026)
9
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles