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Futures contracts have unique tax treatment compared to stocks and other investments. In the U.S., Futures are taxed under the "60/40 rule", meaning 60% of gains are taxed as long-term capital gains, and 40% as short-term capital gains, regardless of holding period.
60/40 Tax Rule for Futures (Section 1256 Contracts) Under IRS Section 1256, futures contracts and certain options are given preferential tax treatment: 60% of gains/losses → Long-term capital gains (max 20% tax rate) 40% of gains/losses → Short-term capital gains (taxed as ordinary income, max 37%) Effective Tax Rate: The blended tax rate is a max of ~26.8%, which is lower than the max 37% tax rate for ordinary income. Example Calculation: If a trader earns $10,000 in futures trading profits:
Mark-to-Market (MTM) Accounting for Futures Unlike stocks, futures are marked-to-market daily, meaning gains/losses are realized at year-end, even if you don’t sell. Losses can be used for tax deductions (up to $3,000 per year, with unlimited carryforward). Other Futures Tax Considerations Futures held in IRAs – No immediate tax implications; tax is deferred. Foreign Traders – Tax treatment varies by country (e.g., U.K. traders may be exempt from capital gains tax). Hedging vs. Speculation – Hedging gains may be taxed as ordinary business income. |
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