If you trade futures — /ES, /NQ, /MES, /CL, currency futures, or any other regulated futures contracts — you have access to a tax advantage that stock traders simply do not get. It's called Section 1256 treatment, and it could save you thousands per year.
What Is Section 1256?
Section 1256 of the Internal Revenue Code applies to "regulated futures contracts" and certain other financial instruments. Under this rule, all gains and losses from qualifying contracts are treated as 60% long-term capital gains and 40% short-term capital gains — regardless of how long you actually held the position.
This is called the "60/40 rule." Even if you day-traded futures for seconds, 60% of your gains are taxed at the more favorable long-term capital gains rate.
✅ The math: A stock day trader in the 37% bracket pays 37% on all short-term gains. A futures trader in the same bracket pays a blended rate of roughly 26.8% (60% at 20% long-term rate + 40% at 37% short-term rate). On $100,000 in gains, that's over $10,000 in extra taxes the stock trader pays.
Which Contracts Qualify for Section 1256?
Section 1256 applies to:
- Regulated futures contracts (CME, CBOT, NYMEX traded contracts like /ES, /NQ, /CL, /GC)
- Foreign currency contracts traded on qualified exchanges
- Non-equity options (index options like SPX, NDX, RUT)
- Dealer equity options and dealer securities futures contracts
Section 1256 does NOT apply to individual stock options, ETF options, or equity options like SPY or QQQ options.
No Wash Sale Rules for Futures
Section 1256 contracts are completely exempt from wash sale rules. You can sell an /ES futures contract at a loss and buy it back immediately — the loss is fully deductible. This is a significant advantage over stock and options traders who must navigate the 30-day wash sale window.
Mark-to-Market for Futures
Section 1256 contracts are also subject to automatic mark-to-market accounting at year-end — meaning open positions are treated as if sold on December 31. You do not need to make a separate MTM election for futures; it applies automatically. This means all your Section 1256 gains and losses are reported on Form 6781, not Schedule D.
Section 1256 Loss Carryback
One unique feature of Section 1256 losses: you can carry them back up to 3 years to offset prior-year Section 1256 gains. This is rare in the tax code. If you have a losing year trading futures, you can potentially get a refund of taxes paid in prior profitable years.
Mixed Trading: Futures + Stocks
Many active traders trade both futures and stocks or options. In this case, you have two separate tax treatments in the same return. The futures income goes on Form 6781, stock trades go on Schedule D, and you must track them separately. This is where a trader-specialized CPA earns their fee.
The Bottom Line
If you're trading futures and not explicitly planning around Section 1256, you're almost certainly overpaying in taxes. The 60/40 split, combined with no wash sale rules and automatic MTM, makes futures one of the most tax-efficient trading instruments available to retail traders.