How Are Futures Taxed? Section 1256 Basics

Futures contracts on things like the S&P 500 E-mini (ES) fall under Section 1256 of the tax code, which taxes gains and losses using a blended 60/40 rate: 60% at the long-term capital gains rate and 40% at your ordinary income rate, no matter how long you held the contract. On top of that, Section 1256 contracts are marked to market at year-end, meaning you owe tax on open positions even if you never closed the trade. This is one of the biggest structural differences between trading futures and trading stocks, and it changes how you should think about record keeping, timing, and even strategy design.

What is Section 1256?

Section 1256 is the part of the IRS code that covers regulated futures contracts, foreign currency contracts, and a handful of other instruments including broad-based index options. If you trade ES futures, your contracts fall under this rule automatically. You don't elect into it and you can't opt out of it.

The section exists because futures markets settle differently than stock markets. Futures accounts are marked to market daily by the exchange itself, so cash moves in and out of your account every day based on the settlement price. The tax code follows that same logic at year-end, treating your open positions as if you'd sold them on December 31 even if you hadn't.

The 60/40 blended rate explained

Here's the mechanism. Whatever your net gain or loss is for the year on Section 1256 contracts, 60% of it is taxed at the long-term capital gains rate and 40% is taxed at your ordinary short-term rate. This applies whether you held a contract for eleven months or eleven minutes.

That's a real advantage for active traders. Under standard stock rules, a trade closed in less than a year is taxed entirely at your ordinary income rate, which for many traders is higher than the long-term capital gains rate. A futures trader who scalps the ES all day still gets 60% of their net profit taxed at the lower rate. It's a structural feature of the instrument, not a reward for good behavior.

The tax bill on a futures position can arrive before the trade is ever closed.

What does mark-to-market mean at year-end?

Mark-to-market means the IRS treats your open Section 1256 positions as if you closed them at the closing price on the last trading day of the year, then immediately reopened them on January 1 at that same price. You pay tax on the gain (or claim the loss) for that year, even though the position is still live in your account.

This has a real consequence: you can owe tax on money you haven't actually taken out of the market. If you're holding a large unrealized gain on December 31, that gain gets taxed as if it were realized, and the clock resets on January 1 for whatever happens next. There's no way to defer it by simply holding the position into the new year.

How are futures taxed compared to stocks?

With stocks, the holding period is everything. Sell a stock you've held for less than a year and the entire gain is taxed as ordinary income. Hold it more than a year and the entire gain gets the long-term rate. There's no blending and no mark-to-market: you only owe tax when you actually sell.

Futures work the opposite way on both counts. The 60/40 split ignores holding period entirely, and mark-to-market taxes you on paper gains whether you've sold or not. Stock traders can also run into wash sale rules that disallow losses on repurchased shares within 30 days. Section 1256 contracts are exempt from the wash sale rule, which simplifies record keeping considerably for anyone trading futures actively.

Reporting and the loss carryback option

Section 1256 gains and losses get reported on IRS Form 6781, which separates the 60% long-term and 40% short-term portions for you. Most futures brokers issue a 1099-B that already shows your net gain or loss for the year, which makes filling out the form mostly a matter of transcription rather than calculation.

One feature worth knowing about: if you have a net loss on Section 1256 contracts, you may be able to carry it back up to three years to offset prior Section 1256 gains, instead of only carrying it forward. This is a narrower and more specific option than the general capital loss carryforward rules that apply to stocks, and it's worth discussing with a tax professional if you have a losing year.