Regulated Futures Contracts: 60/40 Split, Mark-to-Market, Form 6781

Regulated futures contracts get a distinctive tax treatment under Section 1256 of the Internal Revenue Code: 60 percent of every gain or loss is taxed as long-term capital gain or loss and 40 percent as short-term, regardless of how long you actually held the position. On top of that split, any open contract is marked to market on the last business day of the year and taxed as if you had sold it at that day’s closing price. The combination pushes an active trader’s effective rate well below what the same activity in stocks would produce, but it also means you cannot defer a winning position into the next tax year the way you can with equities.

What Qualifies as a Regulated Futures Contract

A futures contract is “regulated” for Section 1256 purposes only if it meets two conditions. The margin you must post and the amount you can withdraw have to depend on a system of daily marking to market. And the contract has to trade on, or be subject to the rules of, a qualified board or exchange.¹

A qualified board or exchange means either a national securities exchange registered with the SEC or a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission.¹ Both prongs matter. A contract using daily margining but trading on an unregistered venue fails the second, and a contract listed on a qualifying exchange but settled outside its margin system fails the first. Standard CME, CBOT, NYMEX, and Cboe futures satisfy both without issue. Less conventional instruments, including anything traded over-the-counter, deserve a closer look before you assume you get the tax benefit.

Section 1256 also covers foreign currency contracts, nonequity options (broad-based index options are the common example), dealer equity options, and dealer securities futures contracts. The statute specifically excludes interest rate swaps, currency swaps, credit default swaps, equity swaps, and similar agreements, along with securities futures contracts held by anyone other than a registered dealer.²

The 60/40 Split in Practice

Every gain or loss on a Section 1256 contract is automatically divided into 60 percent long-term and 40 percent short-term capital gain or loss.³ The holding period is irrelevant. Open and close a position in minutes and you still get the long-term rate on 60 percent of the profit. A stock trade held less than a year, by contrast, is taxed entirely at your ordinary income rate.

For 2026, the top ordinary income rate is 37 percent for single filers with taxable income above $640,600 and married couples filing jointly above $768,700.⁴ Long-term capital gains are taxed at 0, 15, or 20 percent depending on total taxable income.⁵ A taxpayer in the highest bracket therefore pays a blended maximum rate of about 26.8 percent on Section 1256 gains: 60 percent taxed at 20 percent plus 40 percent taxed at 37 percent. Compare that to 37 percent on short-term stock gains.

High-income taxpayers may also owe the 3.8 percent Net Investment Income Tax. It applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married couples filing jointly, or $125,000 for married filing separately.⁶ These thresholds are not indexed for inflation. When the NIIT applies, the effective ceiling on Section 1256 gains rises to roughly 30.6 percent.

Year-End Mark-to-Market

Every Section 1256 contract you still hold at the close of the last business day of the tax year is treated as if you sold it at fair market value on that date.³ The resulting gain or loss goes on your return for that year even though you never closed the position. The closing price on the final trading day of December is the benchmark.

This blocks a common deferral move. Holding a winning position open across New Year’s does not push the tax into the following year for futures the way it can for stocks. If the contract is worth more than your basis on December 31, you owe tax on the difference now.

To keep the same gain from being taxed twice, your basis in the contract resets at the start of the following year to the fair market value used in the year-end calculation. Recognize a $5,000 gain on December 31 and your basis rises by $5,000. When you eventually close the position, only the change in value since the reset produces new gain or loss. Over the life of the contract, total taxed profit equals total economic profit.

The Wash Sale Rule Does Not Apply

Section 1256(f)(5) explicitly exempts any loss taken into account under the year-end mark-to-market provision from the wash sale restrictions in Section 1091.⁷ If your futures position shows a loss at year-end and you report it under mark-to-market, you can reenter the same contract the next day without losing the deduction. Stock and ETF traders lose the deduction if they repurchase a substantially identical security within 30 days. Futures do not carry that penalty, which makes them useful for year-end tax-loss harvesting without disrupting a trading strategy.

Reporting on Form 6781

All Section 1256 activity goes on IRS Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.⁸ Your broker does most of the arithmetic. Box 11 on Form 1099-B reports the aggregate profit or loss for the year from regulated futures, foreign currency contracts, and Section 1256 option contracts combined, capturing both realized and unrealized results after mark-to-market.⁹

You enter that aggregate in Part I of Form 6781. The form applies the 60/40 split — multiplying the net figure by 40 percent for short-term and 60 percent for long-term — and those amounts flow to Schedule D of Form 1040.⁸

The most common filing mistake is a mismatch between the Box 11 number on your 1099-B and the figure on Form 6781. The IRS matches these automatically, and small discrepancies can trigger a notice. If you traded through multiple brokers, each sends its own 1099-B; you combine the totals on a single Form 6781 and keep every 1099-B on file.

Carrying Section 1256 Losses Back Three Years

Most capital losses can only be carried forward. Section 1256 losses are different. You can elect to carry them back to offset Section 1256 gains reported in the three prior tax years.¹⁰ The carryback is an election, not automatic. The carried-back amount keeps its 60/40 character, with 60 percent treated as long-term and 40 percent as short-term.

Limits apply. The loss carried to any prior year cannot exceed the net Section 1256 gain you reported that year, and the carryback cannot create or increase a net operating loss in the prior year.¹⁰ The loss offsets only Section 1256 gains in those prior years, not stock gains or other income. Anything left over after the three-year lookback carries forward under normal capital loss rules.

You have two ways to claim the refund. Form 1045 is the faster route: the IRS is supposed to process it within 90 days, and you must file it within one year after the end of the loss year. You attach a copy of Form 6781 and Schedule D for the loss year, plus amended versions of both forms for each carryback year.¹¹ Form 1045 is a tentative refund application, not a formal claim, so if the IRS denies it you cannot sue over the denial without filing an amended return.

The alternative is Form 1040-X for each carryback year. It takes longer but is a formal refund claim with full appeal rights. Certain situations require Form 1040-X rather than Form 1045, including carrybacks to a Section 965 transition tax year and carrybacks that release a prior-year foreign tax credit.¹¹ For a trader coming off a losing year after several profitable ones, Form 1045 is usually the simpler path.

Hedges and Mixed Straddles

Two situations pull a contract out of the standard 60/40 mark-to-market treatment. If a contract is part of a hedging transaction, ordinary gain and loss rules apply instead, but you must identify the position as a hedge before the close of the day you enter it.⁷¹² Miss that same-day window and the contract stays in Section 1256 regardless of your intent.

A mixed straddle arises when you hold a Section 1256 contract and an offsetting non-Section 1256 position at the same time, like a futures contract paired with the underlying stock. You can elect on Form 6781 to pull the Section 1256 contract out of mark-to-market, but you must identify each position on the day you acquire the first Section 1256 contract in the straddle.¹³ Once made, the election is permanent unless the IRS grants permission to revoke it, and the affected contracts get reported in Part II of Form 6781 rather than Part I.

1
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market – Section: Definitions
2
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
3
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market – Section: General Rule
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
6
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
7
Office of the Law Revision Counsel. 26 US Code 1256 – Section 1256 Contracts Marked to Market
8
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
9
Internal Revenue Service. Instructions for Form 1099-B
10
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers – Section: Carryback of Losses From Section 1256 Contracts
11
Internal Revenue Service. Instructions for Form 1045
12
eCFR. 26 CFR 1.1256(e)-1 – Identification of Hedging Transactions
13
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles