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What is a Section 1256 contract, and what is 60/40 treatment?

Direct answer Options on a broad-based index (the S&P 500 index itself, not an ETF on it), regulated futures, and a few other instruments. They are marked to market at year-end and any gain is taxed 60% long-term and 40% short-term regardless of holding period, a blended federal rate of 26.8% at the top bracket. California conforms to the timing but taxes both parts the same.

This is the “60/40” on an option-income fund’s fact sheet. It applies to the option premium leg only, and only federally. Options on a single stock or on an ETF get ordinary holding-period treatment. Read the one-year line.

Sources

  1. IRC §1256law.cornell.edu
  2. IRS Form 6781 instructionsirs.gov

Used in

The one-year line is worth 17 cents per dollar Everyone knows the line. In 2015 individuals still realized $3.3 billion of stock gains within three months of it, at the short-term rate. Where a known rule gets crossed early, and what it costs. Trend following made money in all five of the worst US equity years since 1985 AQR's diversified trend strategy was positive in every one of the five worst US equity years since 1985, averaging +21.6% while stocks fell 6 to 39%.

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