Tax On Futures.....What Are The Rules?

Though April 15 hasn't yet arrived, it's never too early to start thinking about taxes. Because everyone’s personal financial situation is different, and because the tax implications of futures trading can be complicated, it’s important to consult your accountant or tax advisor. But here’s a quick primer, so that you’ll at least be aware of the main issues.

The universe of trading instruments is growing every day, providing traders with many new opportunities for profits. From a tax perspective, the U.S. Internal Revenue Code classifies all these instruments into two main tax categories: Securities or Commodities. Products classified as commodities have tax benefits securities do not have.

Commodities, or “regulated futures contracts” (RFCs), are traded on commodities exchanges, and as the "regulated" label suggests, these RFCs are regulated by the exchange and the U.S. Commodity Futures Trading Commission.

Exchange traded futures products, including “currency RFCs” are considered to be Section 1256 contracts in the U.S. Internal Revenue Code. Business traders and all investors report RFC Section 1256 contracts as capital gains and losses on Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). This allows them to split the gains and losses 60/40 on Schedule D: 60% long-term, 40% short-term.

One of the most common questions we see is this: Are futures trades executed on foreign exchanges also taxed at 60/40 for U.S. citizens, or does the 60/40 blend apply only to futures contracts traded at U.S. exchanges?

There's a reasonable basis in fact and law to conclude that futures traded on certain foreign contract markets with either a CFTC Rule 30.10 exemption or No Action Letter are entitled to classification as Section 1256 contracts (e.g., regulated futures contracts) with the result that 60/40 tax treatment is appropriate.