The Complete Guide to Futures Trading: What You Need to Know about the Risks and Rewards

CHAPTER 13

The Tax Factor for Traders

When newcomers begin to trade futures, taxes probably are not at the top of their list of concerns. But there are tax advantages with futures trading, in addition to the benefits of leverage, short selling, and the like that futures offer.

Several caveats should be mentioned before getting into a discussion on the tax treatment of futures and currency transactions:

• Tax laws are subject to change by Congress at any time and are constantly evolving. For current-year tax regulations, you should consult an accountant or tax adviser.
• This chapter covers only federal income tax provisions. Various states may have applicable rules that could affect your total tax picture as it relates to trading.
• This chapter covers only the general rules for taxing the results of futures and currency trading by the typical individual trader and does not get into other tax issues such as achieving trader status or complex trading arrangements. You should definitely find an accountant or tax specialist to advise you on those matters.

SECTION 1256 CONTRACTS

For tax purposes, it is important to determine whether a contract comes under Section 1256 of the Internal Revenue Code (IRC) because gains or losses from these contracts are treated differently than those from stocks or interest-bearing instruments.

Section 1256 includes any regulated futures contracts, foreign currency contracts, nonequity options, and dealer equity options. A regulated futures contract is a ...