How Silver Options Are Taxed Under Section 1256

Silver options taxed under Section 1256 get a 60/40 treatment: 60% of any net gain or loss is taxed as long-term capital gain or loss and 40% as short-term, no matter how briefly you held the position. The rule applies to COMEX-listed silver options, forces you to mark open positions to market at year-end, and gets reported on Form 6781. It also unlocks a three-year loss carryback and exempts you from the wash sale rules. For a top-bracket taxpayer, the blended federal rate comes out to roughly 26.8%, versus 37% on ordinary short-term gains.¹

Which Silver Options Actually Qualify

Section 1256 covers “nonequity options” listed on a qualified board or exchange. COMEX, a CME Group division designated as a contract market by the Commodity Futures Trading Commission, is a qualified board. Standard COMEX silver options — options on the silver futures contract covering 5,000 troy ounces — fall squarely within Section 1256.²

Options on silver ETFs are a different animal. Those are equity options on fund shares, not nonequity options on commodity futures, and they generally do not qualify for Section 1256. Over-the-counter silver derivatives also fall outside. Trades in those instruments follow ordinary capital gains rules: the full gain is short-term at your ordinary rate if you held under a year, long-term at capital gains rates if you held longer.

The 60/40 Split and the Blended Rate

Every dollar of net gain or loss from a qualifying silver option is split automatically: 60% long-term, 40% short-term. Your actual holding period does not matter. Open a COMEX silver option at 9:30 a.m., close it at 10:00 a.m. at a profit, and 60% of that profit still gets the long-term rate.

For someone in the top federal ordinary bracket, the arithmetic runs:

60% of the gain at the top long-term capital gains rate of 20%
40% of the gain at the top short-term rate of 37%
Blended: (0.60 × 20%) + (0.40 × 37%) = 26.8%

One layer people forget. The 3.8% Net Investment Income Tax under Section 1411 applies on top for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). Section 1256 gains count as net investment income, pushing the true federal maximum closer to 30.6%.³ Still well under the 40.8% those same taxpayers pay on ordinary short-term gains.

Year-End Mark to Market

Section 1256 does not let you defer tax on open positions. Any qualifying contract you still hold at the close of the tax year is treated as sold for fair market value on the last business day of that year, and any unrealized gain or loss becomes a realized event for tax purposes.¹

That December 31 value then becomes your new cost basis. If you carry a position into the next year and eventually close it higher, you owe tax only on the further gain above the year-end mark. If it falls, you take a loss from the adjusted basis.

The tradeoff runs both ways. You cannot defer a large unrealized gain into a future year the way a stock holder can. You also cannot let an unrealized loss sit uncollected — it hits your return automatically.

Reporting on Form 6781

All Section 1256 gains and losses are reported on IRS Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. Part I is where the aggregate net gain or loss goes.⁴

Your broker typically issues a Form 1099-B summarizing the year’s activity in these contracts, including the year-end mark-to-market adjustments. Numbers from the 1099-B flow onto Form 6781, and the form performs the 60/40 split for you: enter a single net figure, and it allocates 60% to long-term and 40% to short-term automatically. From there, the amounts move to Schedule D.

The Three-Year Loss Carryback

One of the more valuable features of Section 1256 is a loss carryback that regular capital losses do not get. Individuals with a net Section 1256 loss can elect to carry it back up to three years to offset prior Section 1256 gains. The election is not available to corporations, estates, or trusts.⁵

You make the election by checking Box D on Form 6781, then filing either Form 1045 (Application for Tentative Refund) or an amended return with an amended Form 6781 and Schedule D for each carryback year. The loss goes to the earliest eligible year first.⁶

The carried-back loss keeps its 60/40 character (60% long-term, 40% short-term). The amount you can carry back to a given year is capped by that year’s net Section 1256 gain, and the carryback cannot create or increase a net operating loss in the carryback year.⁵

Compare that to ordinary capital losses, which can offset only $3,000 of ordinary income per year and carry forward only. A bad year in silver options after a profitable one can produce an actual refund from a prior return.

No Wash Sale Rules

Section 1256 contracts are explicitly exempt from the wash sale rules. Section 1091 does not apply to any loss recognized under the mark-to-market provisions.¹

Practically, you can sell a COMEX silver option at a loss and immediately reenter the same or a substantially identical contract without the loss being deferred. Stock traders have to wait 30 days or watch the loss get folded into the basis of the replacement position. That constraint does not exist here.

Watch for Straddles With Physical Silver or ETFs

The clean 60/40 story gets messier if you hold offsetting positions. If your COMEX silver option sits alongside physical silver, a silver ETF, or another non-Section 1256 instrument that hedges it, the IRS may treat the combination as a “straddle” under Section 1092.

The core rule: closing the losing leg while the winning leg still has unrecognized gain defers your loss to the extent of that gain.⁷ The purpose is to stop taxpayers from harvesting losses while sitting on offsetting gains.

When one leg is a Section 1256 contract and the other is not, you have a mixed straddle. Form 6781 offers three elections to manage it:

Mixed straddle election (Box A), which elects out of Section 1256 treatment for the contracts involved
Straddle-by-straddle identification (Box B), matching gains and losses within each identified straddle
Mixed straddle account election (Box C), grouping designated positions and netting them at year-end

Make no election, and a loss on the Section 1256 leg may be reduced by unrecognized gain on the non-Section 1256 leg.⁸ If you trade COMEX silver options while also holding physical silver or a silver ETF position, the straddle rules can quietly undo some of the benefits described above. It is worth reviewing your overall silver exposure before assuming the 60/40 math applies cleanly.

1
Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
2
CME Group. Silver Option Contract Specifications
3
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
4
Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
5
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
6
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
7
eCFR. 26 CFR 1.1092(b)-1T – Coordination of Loss Deferral Rules
8
Internal Revenue Service. Form 6781, Gains and Losses From Section 1256 Contracts and Straddles