Most futures contracts fall under Section 1256 of the tax code, which applies a fixed 60% long-term and 40% short-term capital gains split to every position, regardless of how long you actually held it. A trade opened and closed in the same afternoon gets the same 60/40 treatment as one held for a year. That’s structurally different from how stocks and most other investments are taxed, and it’s one of the more consequential, least understood differences for anyone trading futures.

What Section 1256 actually covers

Section 1256 contracts include regulated futures contracts, most broad-based index options, and a handful of other instrument types defined by the tax code. Regulated futures contracts, the kind traded on US exchanges like the CME, are the core case. If you’re trading standard futures products through a US-regulated exchange, you’re almost certainly dealing with Section 1256 treatment by default, not by election.

The 60/40 split, in practice

Sixty percent of any gain or loss is treated as long-term, taxed at the lower long-term capital gains rate. Forty percent is treated as short-term, taxed at ordinary income rates. This applies automatically, there’s no minimum holding period to qualify, and no way to opt out of it for a standard futures contract. A day trader who never holds a position overnight still gets the same 60/40 blend as someone who held a single contract for eleven months.

This is a real, structural tax advantage for active futures traders compared to short-term stock trading, where gains held under a year are taxed entirely at ordinary income rates with no blended treatment available at all.

Mark-to-market at year end

Section 1256 contracts are also subject to mark-to-market treatment at the end of the tax year. Open positions on December 31st are treated as if they were sold at fair market value that day, for tax purposes, even if you haven’t actually closed them. Any resulting gain or loss gets the same 60/40 treatment, and your cost basis resets from that marked value going into the new year. This is a genuine structural feature of how these contracts are taxed, not an edge case, and it means your tax liability for the year can include unrealized gains on positions you’re still holding.

How this compares across instruments

Stocks are taxed on actual holding period, ordinary rates under a year, the lower long-term rate after, covered in more detail in our futures vs. stocks comparison. Spot forex is taxed under Section 988 by default, treated as ordinary income, though certain pairs can be elected into Section 1256 treatment instead, covered in our futures vs. forex comparison. Options split depending on type, equity options are taxed like the underlying stock, while broad-based index options and options on regulated futures generally pick up the same Section 1256 treatment futures get, covered in our futures vs. options comparison.

Section 1256 treatment is reported on IRS Form 6781, separately from the standard capital gains reporting used for most other investments. Your broker’s 1099-B for futures activity is typically structured to align with this form directly.

This page is for informational purposes only and is not tax, legal, or financial advice. Tax treatment depends on your specific contracts, trading pattern, and individual circumstances. Consult a licensed tax professional before making decisions based on your specific situation. See our Legal Disclaimer for details.