Section 1256: How the 60/40 Tax Rule Works

Under the Section 1256 60/40 rule, every dollar of gain or loss from a Section 1256 contract is treated as 60% long-term and 40% short-term capital gain or loss, no matter how briefly you held the position.¹ A futures trade you opened and closed in an afternoon receives the same 60% long-term allocation as a stock held for more than a year. Losses split the same way, so they can offset both long-term and short-term gains from other investments.

What the 60/40 Split Does to Your Tax Bill

For 2026, long-term capital gains are taxed at 0%, 15%, or 20% depending on income, while short-term gains are taxed at your ordinary rate, up to 37%. The 60/40 rule pushes most of your profit into the lower long-term brackets.

Take a single filer with taxable income above $545,500 who realizes a $10,000 gain. Without the rule, the whole gain would be short-term at 37%, or $3,700 in tax. Under Section 1256:

Long-term portion (60%): $6,000 at 20% = $1,200
Short-term portion (40%): $4,000 at 37% = $1,480
Total tax: $2,680

That’s a $1,020 savings on a single $10,000 gain. For active traders with six-figure annual profits, the cumulative difference is meaningful. The savings are even larger for taxpayers whose long-term rate is 15% or 0%.

High-income taxpayers should factor in the 3.8% net investment income surtax, which applies to Section 1256 gains once modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).² With the surtax, the top rate on the long-term piece is 23.8% and the short-term piece can reach 40.8%. The blended rate still comes in well below straight short-term treatment.

Which Contracts Qualify

Five categories of contracts receive Section 1256 treatment:¹

Regulated futures contracts standardized on a CFTC-designated exchange with daily margin adjustments.
Foreign currency contracts requiring delivery or settlement in a foreign currency, traded in the interbank market at arm’s-length pricing.
Nonequity options, meaning listed options that are not equity options. Options on broad-based stock indexes and commodities qualify; options on individual stocks or narrow-based indexes are excluded.
Dealer equity options held by a registered options dealer in the ordinary course of business.
Dealer securities futures contracts held by dealers in the ordinary course of business.

Several instruments do not qualify: securities futures contracts held by non-dealers, interest rate swaps, currency swaps, credit default swaps, and similar agreements.¹ Options on individual stocks are the most common surprise for new traders — they follow ordinary capital gains rules based on holding period, not the 60/40 split.

Year-End Mark-to-Market

Any Section 1256 contract you still hold on the last business day of the tax year is treated as sold at fair market value that day.¹ You recognize the gain or loss for the current year even though the position is still open. The year-end fair market value becomes your basis going into January, so when you eventually close, only the gain or loss from the new year is left to report.

You can’t defer a winning position by holding it across December 31. Every open contract resets annually.

No Wash Sale Rule

Section 1256 contracts marked to market are exempt from the wash sale rules that would otherwise disallow a loss when you buy a substantially identical position within 30 days.¹ If you take a loss on S&P 500 futures in late December, you can re-enter the same position the next trading day and still deduct the loss. Stock and ETF traders don’t get that flexibility. The exemption covers both year-end deemed sales and positions actually closed during the year.

Three-Year Loss Carryback

Most capital losses can only be carried forward. Net Section 1256 losses give you a second option: you can carry them back to offset Section 1256 gains from any of the three preceding tax years.³ The 60/40 character travels with the loss, so 60% is long-term and 40% is short-term in the carryback year.

Two limits apply. The carryback can only offset prior-year gains from Section 1256 contracts, not gains from stocks or other investments. And it cannot create or increase a net operating loss in the prior year. The loss goes to the earliest eligible year first, with any remainder moving forward in sequence.

To claim a refund, file Form 1045 (Application for Tentative Refund) within 12 months after the end of the loss year.⁴ The carryback is elective. If you expect larger Section 1256 gains ahead, you may prefer to carry the loss forward.

The Forex Election Out

Foreign currency contracts create tension between two provisions. Under Section 988, gains and losses on foreign currency transactions are ordinary income or loss. But foreign currency contracts that qualify under Section 1256 fall under the 60/40 rule by default.⁵

If you trade qualifying interbank forex contracts, you can elect to have them treated under Section 988 instead. The election must be made on or before the first day of the tax year, or before the first day you hold such a contract if that comes later. In a partnership, each partner elects separately.

Why give up 60/40? Losses. Ordinary losses from forex offset ordinary income dollar-for-dollar with no annual cap. Capital losses are limited to $3,000 per year against ordinary income. A trader expecting net losses might prefer Section 988 treatment. The election has to be made in advance, before you see how the year turns out.

When the 60/40 Rule Doesn’t Apply

Two situations pull contracts out of the standard treatment. If you enter a Section 1256 contract to manage price, currency, or interest rate risk for property or obligations in your business, and you identify it as a hedge before the close of the day you enter it, the gain or loss is ordinary rather than 60/40.⁶ Miss the identification deadline and the contract stays under the standard rules. You can’t retroactively label a losing speculative trade as a hedge.

Dealers also see different treatment on the self-employment side. For non-dealer traders, Section 1256 gains are capital and stay outside the self-employment tax base.⁷ For options and commodities dealers, gains from contracts traded in the normal course of business remain subject to self-employment tax.

How to Report It

Your broker sends Form 1099-B with the aggregate profit or loss from all your Section 1256 contracts in Box 11. The figure already reflects the mark-to-market calculation on any positions open at year-end.⁸

You report that number on Form 6781 (Gains and Losses From Section 1256 Contracts and Straddles), Part I, Line 1.⁹ The form does the split for you:

Line 8: 40% of the net gain or loss goes to the short-term portion, which transfers to Schedule D, Line 4.
Line 9: 60% of the net gain or loss goes to the long-term portion, which transfers to Schedule D, Line 11.

Those amounts merge with your other capital gains and losses on Schedule D and flow to Form 1040.¹⁰ If you’re carrying a loss back, file Form 1045 within 12 months after the loss year ends.

1
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
2
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
3
Office of the Law Revision Counsel. 26 US Code 1212 – Capital Loss Carrybacks and Carryovers
4
Internal Revenue Service. About Form 1045, Application for Tentative Refund
5
Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions
6
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
7
Office of the Law Revision Counsel. 26 US Code 1402 – Definitions
8
Internal Revenue Service. Instructions for Form 1099-B (2026)
9
Internal Revenue Service. Form 6781 (2025) Gains and Losses From Section 1256 Contracts and Straddles
10
Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles