Tax on Commodity Trading: 60/40 Rule, ETFs, and Reporting

The tax on commodity trading depends on what you’re actually trading. Regulated futures contracts and non-equity options fall under Section 1256 of the Internal Revenue Code, which splits every gain or loss 60% long-term and 40% short-term regardless of holding period. Physical gold, silver, and other metals are taxed as collectibles, with long-term gains capped at 28%. Commodity ETFs, ETNs, and business hedging positions each follow their own rules. Higher earners owe an extra 3.8% on top. The rules below cover how each piece works and how to report it.

The 60/40 Rule for Futures and Non-Equity Options

If you trade regulated futures contracts or non-equity options on a domestic exchange, the tax code automatically classifies those as Section 1256 contracts and splits every dollar of gain or loss into 60% long-term and 40% short-term — no matter how briefly you held the position.¹ Because long-term capital gains rates (0%, 15%, or 20%) run well below ordinary income rates, the blended effective rate on futures gains lands around 26% to 28% for someone in the top bracket. Compare that to a short-term stock trade, where every dollar is taxed at your full ordinary rate.

Section 1256 contracts include regulated futures, foreign currency contracts, and non-equity options. They do not include swaps of any kind — commodity swaps, interest rate swaps, or credit default swaps.¹ The line between a regulated futures contract and an over-the-counter commodity product matters. If your broker offers OTC commodity products that aren’t traded on a designated exchange, those likely fall outside Section 1256 and get taxed based on your actual holding period.

Year-End Mark-to-Market

Section 1256 doesn’t let you defer taxes by holding an open position across December 31. The IRS treats every open futures or options position as if you sold it at fair market value on the last business day of the year.¹ Any unrealized gain or loss is booked as taxable income for that year, split 60/40 like a closed position.

When the new tax year begins, your cost basis adjusts to the year-end valuation. If you carried a crude oil position showing a $5,000 profit at year-end, you already paid tax on that $5,000, and your new basis starts at the marked value. The gain won’t be taxed again when you close the trade. That produces a clean handoff between tax years, but it also means you can owe tax in a year where you haven’t taken any cash off the table.

Physical Metals and the 28% Collectibles Rate

Gold coins, silver bullion, platinum bars, and other physical commodities the IRS classifies as collectibles get less favorable treatment. Held more than a year, gains are taxed at a maximum rate of 28% rather than the standard 15% or 20% that applies to most long-term capital gains.² Sold within 12 months, the gain is ordinary income at your marginal rate.

The definition of collectible for tax purposes comes from Section 408(m) and covers metals, gems, stamps, coins, and works of art.³ The 28% figure is a ceiling, not a floor. If your marginal rate is 22%, you pay 22% on long-term collectibles gains. Track your cost basis carefully — it includes the premium you paid over spot price plus any storage or shipping fees.

Commodity ETFs and ETNs

The tax treatment of commodity exchange-traded products depends entirely on how the fund is structured, and the differences can move your after-tax return by several percentage points.

Futures-Based ETFs

Most commodity ETFs that hold futures are organized as publicly traded partnerships. You get a Schedule K-1 each year rather than a standard 1099, and you must report your share of the fund’s gains annually whether or not you sold any shares. Because the underlying holdings are Section 1256 contracts, gains generally receive the 60/40 split. The annual pass-through usually eliminates any additional gain or loss when you eventually sell your shares.

Physical-Backed ETFs

ETFs that hold physical gold or silver are typically structured as grantor trusts. You don’t owe tax until you sell, which is simpler from a cash-flow standpoint. The trade-off: because the trust holds physical metal classified as a collectible, long-term gains face the 28% ceiling rather than the 15% or 20% rate.

Exchange-Traded Notes

Commodity ETNs are unsecured debt instruments issued by a bank, not funds that hold actual commodities. The IRS generally treats them as prepaid forward contracts, so you recognize no gain or loss until you sell, redeem, or the note matures.⁴ Gains at that point are capital gains taxed at standard rates based on holding period. ETNs skip both the K-1 and the collectibles rate, but you’re taking on the issuing bank’s credit risk.

The 3.8% Net Investment Income Tax

Higher-income traders owe an additional 3.8% surtax on top of their capital gains rate. The net investment income tax applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.⁵ The statute names trading in financial instruments or commodities as a covered activity.⁶

The 3.8% applies to the lesser of your net investment income or the amount by which your modified AGI exceeds the threshold. A single filer earning $300,000 with $80,000 in commodity futures gains owes the surtax on the full $80,000, because the $100,000 excess over the threshold is larger. That pushes the effective top rate on Section 1256 gains to roughly 30% to 32% for high earners, and the effective rate on collectibles gains to about 31.8%.

Losses: Carryback and No Wash Sale Rule

The Three-Year Carryback

Section 1256 losses can be carried back to offset Section 1256 gains in any of the three preceding tax years. The loss carries back to the earliest year first, then forward through the remaining years.⁷ A carryback can generate a refund on taxes you already paid, which puts cash back in your hands during a losing stretch. Any losses left after the three-year window carry forward indefinitely.

The carryback only offsets prior Section 1256 gains, not other income, and it can’t create or increase a net operating loss in the prior year. The carried-back amount keeps its 60/40 split. By contrast, ordinary capital losses are capped at $3,000 per year against other income, with the rest carried forward.⁸

No Wash Sale Rule

Section 1256 contracts are exempt from the wash sale rule that constrains stock traders. Close a losing futures position and immediately reopen an identical one, and you can still claim the loss in full.⁹ Stock and ETF traders who repurchase a substantially identical security within 30 days see the loss deferred. Tax-loss harvesting is much cleaner in futures markets.

Straddles and Offsetting Positions

Holding offsetting commodity positions — a long gold futures contract paired with a short gold futures contract, for example — triggers straddle rules under Section 1092. You cannot deduct a loss on one leg until the unrecognized gain on the offsetting position is smaller than the loss.¹⁰ Disallowed losses carry forward, subject to the same limitation.

When all legs of a straddle are Section 1256 contracts, Section 1092 generally doesn’t apply because mark-to-market already captures gains and losses annually. The complexity arises with mixed straddles, where one leg is a Section 1256 contract and the other isn’t. There, the loss-deferral rules override the normal mark-to-market treatment for the Section 1256 leg. Improper reporting of mixed straddles is a common audit trigger.

Business Hedging Is Different

Everything above applies to speculative trading. If you’re a business using commodity futures to hedge price risk on inventory or supplies you actually buy and sell, gains and losses are ordinary income or loss, not capital gains.¹¹

To qualify, the position must be entered in the normal course of your business to manage price risk on property you hold or expect to acquire. An airline locking in jet fuel prices or a bakery hedging wheat costs would both qualify. The identification is binding: once you designate a trade as a hedge in your records, gains from that position are ordinary income even if capital treatment would have been more favorable.¹¹ The upside is that ordinary losses are fully deductible against business income without the capital loss limits that restrict speculative traders.

Trader Tax Status and the Section 475(f) Election

Active commodity traders who meet certain thresholds may qualify as traders in securities for tax purposes, which opens up the Section 475(f) mark-to-market election. The IRS looks at whether you trade frequently, devote substantial time to the activity, and seek to profit from short-term price swings.¹² Casual investors who trade a few times a month won’t qualify.

A Section 475(f) election converts trading gains and losses into ordinary income and loss. Ordinary losses aren’t subject to the $3,000 annual capital loss limit or the wash sale rules.¹² Lose $200,000 in a bad year and the full amount can offset other ordinary income immediately rather than dripping out at $3,000 per year. The trade-off is that gains become ordinary income too, giving up the 60/40 treatment.

The election must be filed by the due date of the prior year’s return, without extensions. To make it effective for 2026, you would have needed to attach the election statement to your 2025 return by April 15, 2026. Once made, the election can only be revoked with IRS consent.

Reporting Commodity Trades

Your broker reports the aggregate profit or loss from regulated futures and options on Form 1099-B, using Boxes 8 through 11 to capture closed-position results and year-end mark-to-market adjustments.¹³ Unlike stock trades that generate line-by-line detail, futures brokers typically provide a single net figure. Physical commodity sales may not produce a 1099-B at all, which puts the recordkeeping burden on you.

Section 1256 gains and losses go on Form 6781, which applies the 60/40 split and produces separate short-term and long-term totals.¹⁴ Those totals move to Schedule D, then flow into Form 1040.¹⁵ Carrying losses back to a prior year requires an amended Form 6781 for the carryback year along with an amended return. Physical commodity gains that don’t qualify for Section 1256 go directly on Schedule D as standard capital gains.

Records to Keep

The general statute of limitations is three years from your filing date, but it extends to six years if you underreport income by more than 25%.¹⁶ Given how large the swings in commodity trading income can be, keeping records for six years is the practical baseline.

For physical holdings, retain bullion dealer receipts, storage invoices, and shipping documentation. These records establish cost basis and prove the acquisition date for holding-period purposes. Futures broker statements are typically available electronically, but downloading annual statements is worth the few minutes it takes.

Accuracy-related penalties run 20% on the underpayment for honest reporting mistakes. Given how the rules split across Section 1256, collectibles treatment, straddles, and the various ETF structures, working with a tax professional who handles active traders is often the cheapest line item on the return.

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 1 – Tax Imposed – Section 1(h)(5) Collectibles Gain and Loss
3
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
4
The Tax Adviser. Taxation of Exchange Traded Notes
5
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
6
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
7
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers – Section 1212(c)
8
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
9
Internal Revenue Service. Gains and Losses From Section 1256 Contracts and Straddles
10
Office of the Law Revision Counsel. 26 USC 1092 – Straddles
11
eCFR. 26 CFR 1.1221-2 – Hedging Transactions
12
Internal Revenue Service. Topic No. 429, Traders in Securities
13
Internal Revenue Service. Instructions for Form 1099-B – Proceeds From Broker and Barter Exchange Transactions
14
Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
15
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
16
Internal Revenue Service. How Long Should I Keep Records