What is an IRC §1256 contract?

• A futures contract, foreign currency contract, non-equity option, dealer equity option or dealer securities futures contract that often remains open at the end of the year

• Under the mark-to-market rules, these open contracts are treated as if they were sold at their fair market value on the last day of the year

• Wash sale rules do not apply

• Gains and losses are treated as :

•  60% of gain or loss is treated as long-term

•  40% of gain or loss is treated as short-term

• Reported on Form 6781 which then flows to Schedule D

• Gain or loss on disposition of a IRC §1256 contract must be adjusted for previously recognized gain or loss

• Net IRC §1256 contract losses can be carried back 3 years instead of using them on the current year’s schedule D by making an election on the Form 6781

• This is an exception to the capital loss carry back limitations for personal income tax

• Can only be carried back to a year in which there is a net IRC §1256 contract gain and only to the extent of such gain

With MTM and summary reporting, brokers are able to issue simple one-page 1099-B’s reporting “aggregate profit or loss on contracts” after taking into account realized and unrealized gains and losses. That amount is reported on Form 6781 Part I, which breaks it down to the 60/40 split and then moves those amounts to Schedule D capital gains and losses