How Are Futures Taxed? Section 1256 and the 60/40 Rule

Futures traded on a US futures exchange are generally taxed under Section 1256 of the tax code, as regulated futures contracts, which means 60% of the gain or loss is treated as long-term and 40% as short-term no matter how long the position was held. Section 1256 also requires you to treat contracts you still hold at the end of the tax year as sold at their fair market value on the last business day, so a position left open across New Year is taxed as though you had closed it.

A fixed split and a forced year-end mark are what separate futures taxation from stock taxation. What follows describes the federal rules as the IRS publishes them; it is not tax advice.

What is the 60/40 rule for futures taxes?

The 60/40 rule is the part of Section 1256 that puts 60% of a futures gain or loss in the long-term capital gains column and 40% in the short-term column. IRS Publication 550 attaches no holding-period condition to the split: a contract closed ninety seconds after it was opened and one carried for four months are divided the same way.

It matters because of rates. For taxable years beginning in 2025, IRS Topic 409 puts the rate on most net capital gain at no higher than 15% for most individuals, with a 0% band below certain taxable-income thresholds and 20% on income above them. Net short-term capital gain, by contrast, is taxed as ordinary income at graduated rates. The 60% therefore lands in the lower-rate column even for a trader who never holds anything overnight.

Which contracts count as Section 1256 contracts?

Publication 550 lists five kinds of Section 1256 contract, and the one that matters to most futures traders is the regulated futures contract. The other four are foreign currency contracts, nonequity options, dealer equity options and dealer securities futures contracts.

A regulated futures contract has to satisfy two conditions. The first concerns margin: the sums you are required to put up, and the sums you are free to take out, have to move with the market from one day to the next, which is the daily settlement cycle any futures account runs on — the same account plumbing that sits underneath how day trading margin and overnight margin differ. The second concerns venue: the contract has to trade on a qualified board of exchange, or under its rules.

Publication 550 gives three ways to be a qualified board of exchange. A domestic board of trade can be designated a contract market by the CFTC; a board of trade or exchange can be approved by the Secretary of the Treasury; or a national securities exchange can be registered with the SEC. The first is the usual route for futures. The CFTC's own description of designated contract markets is that they are boards of trade, or exchanges, that it regulates under Section 5 of the Commodity Exchange Act, and that they may let all types of traders in, retail customers included. The tradable instruments list shows what a Lumen account can trade.

Two boundaries trip people up. An equity option — one to buy or sell stock, or one valued by reference to a stock or a narrow-based security index — is not a nonequity option, so it falls outside Section 1256 unless it is a dealer equity option in the hands of an options dealer. An option on a broad-based stock index is a nonequity option and does fall inside, and Publication 550 names the Standard and Poor's 500 index as an example of a broad-based index. Swaps are excluded outright: interest rate, currency, basis, commodity, equity, equity index and credit default swaps, along with interest rate caps and floors.

What happens to a futures position still open on December 31?

A Section 1256 contract you still hold when the tax year ends is generally treated as though you had sold it, at fair market value, on the last business day. The gain or loss belongs to that year. Publication 550 calls this the mark-to-market rule, and it applies whether or not you meant to close the position.

The mark is not double taxation. Whatever you recognised at year end is carried into the sum you do when you finally dispose of the contract, so a position marked up in one year and sold below that mark in the next produces a loss measured from the marked value. Publication 550 applies the same treatment where your rights or obligations under a contract are terminated or transferred during the year, using the contract's value at that moment.

For anyone carrying positions across quarters, what gets marked is whichever contract month you hold on the last business day of the year — a question of when futures contracts roll over.

The exception Publication 550 gives is for hedging transactions. To qualify, the trade has to be entered into in the normal course of a trade or business, primarily to manage the risk of price, interest rate or currency movements on ordinary property or on borrowings, and it has to be clearly identified as a hedge before the close of the day it is entered into.

Does the wash sale rule apply to futures?

The wash sale rule does not apply to losses on commodity futures contracts. Publication 550 confines the rule to stock and securities, and to contracts and options for acquiring or selling them, and then says plainly that commodity futures contracts and foreign currencies are outside its reach.

That removes a category of bookkeeping. A stock trader who takes a loss and buys a substantially identical position inside the thirty-day window on either side has the loss disallowed and added to the basis of the replacement; re-entering a futures contract minutes after closing it at a loss does not. The straddle rules are separate and can still defer losses on offsetting positions, so this is a point about the wash sale rule specifically.

How do you report futures gains and losses to the IRS?

Futures gains and losses go on Form 6781, which the IRS titles "Gains and Losses From Section 1256 Contracts and Straddles". Part I takes every Section 1256 contract closed during the year and every one still open at year end; the net moves to Schedule D at line 4 or line 11, and a copy of the form goes in with the return.

Your broker supplies the raw number. Publication 550 says a Form 1099-B should reach you if you disposed of regulated futures contracts during the year or held contracts with unrealized profit or loss open at either year end, and the amount in box 11 is one of the figures Part I takes in. Where that 1099-B includes a straddle or a hedging transaction, adjustments on Form 6781 may be needed, and the form's own instructions set them out.

Can a futures loss be carried back to earlier years?

An individual with a net Section 1256 contracts loss can elect to carry it back three years instead of only forward. An ordinary excess capital loss has no such route: Topic 409 sends it forward and nowhere else.

The election has limits. What lands in any one year cannot exceed that year's net Section 1256 contracts gain, and cannot create or enlarge a net operating loss there. The earliest of the three years is filled first, then each of the next two, and the loss keeps its 60/40 character throughout; anything unabsorbed goes forward under the ordinary carryover rules. Publication 550 has you make the election by filing Form 1040-X or Form 1045 for the receiving year with an amended Form 6781 and Schedule D. The carryback sits on top of the ordinary relief rather than replacing it: Topic 409 still caps what an excess capital loss can knock off your income at $3,000 a year, or $1,500 if you are married filing separately.

How does this apply to a simulated funded account?

Section 1256 describes a regulated futures contract held in your own name. The year-end mark, the 60/40 split and Form 6781 all presuppose you owned the position, and on a simulated funded account you did not.

The Lumen accounts you can buy — evaluation and funded alike — are simulated accounts trading live market data, with real money paid out on the profits, as our help article on whether the accounts are real money sets out. Because the positions were never yours, our help article on tax on payouts says a payout is generally not a capital gain from trading futures at all, but a share of profit received under a contract. Traders sometimes assume the favourable futures treatment carries across, and in most jurisdictions it does not — a distinction that can change what you owe by a lot.

So the rules above are the tax position of a personal futures account. What you owe on a payout is a different question, and one for an accountant who knows your jurisdiction.

FAQ

Do I pay tax on futures positions I have not closed yet?

Generally yes. The mark-to-market rule in Publication 550 reaches any Section 1256 contract still open on the last business day of the tax year, so a gain on a position you never chose to close is recognised on that year's return. You do not have to work the number out unaided: a broker reports it in box 11 of Form 1099-B, and that figure goes into Part I of Form 6781. Hedging transactions, identified as hedges before the close of the day they are entered into, are the exception.

Are day-traded futures taxed as short-term capital gains?

No, not entirely. Publication 550 imposes the 60/40 split with no holding-period test attached, so a contract opened and closed inside a single session is still divided 60% long-term and 40% short-term. How long you actually held it plays no part in the calculation for Section 1256 contracts. Only the 40% goes into your short-term column, and Topic 409 taxes net short-term capital gain as ordinary income at graduated rates.

Do futures traders receive a Form 1099-B?

Yes. Publication 550 says a broker should send you Form 1099-B if you disposed of regulated futures or foreign currency contracts during the year, or held contracts with unrealized profit or loss open at the end of the year. The amount shown in box 11 of that form is among the figures reported in Part I of Form 6781.

Can I deduct more than $3,000 of futures losses in a year?

Potentially. The $3,000 annual capital loss deduction, or $1,500 if married filing separately, is the general limit under IRS Topic 409. Section 1256 adds a separate route: an individual with a net Section 1256 contracts loss can elect to carry it back three years, capped in each year at that year's net Section 1256 contracts gain, and it cannot create or increase a net operating loss there. The election is made by filing Form 1040-X or Form 1045 with an amended Form 6781 and Schedule D.