1256 Contract

1256 Contract

A 1256 Contract is a term used by the Internal Revenue Service to denote any regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options, cash settled options (including euro-style index options), and dealer security futures options. They are marked to market at the end of the tax year and treated as dispositioned (i.e., "closed"). Any gain or loss from a 1256 Contract is treated for tax purposes as 40% short-term gain and 60% long-term gain.

Typically the gain from any, non 1256 contract will be taxed 100% at the short-term rate because the position is usually held for less than 12 months. Since most futures contracts are traded in a much shorter time frame than the 12 month rule required by the IRS for long term capital gains treatment it creates an inherent tax disadvantage. Thus the 1256 Contract designation was created to enhance the after tax attractiveness of these products.


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