Section 1256 Contracts – Form 6781

Section 1256 contracts prevent tax-motivated straddles that would:

  • Defer income
  • Convert short-term capital gains into long-term capital gains

To do so, Section 1256 requires that these contracts be traded in a market-to-market exchange. You might hold Section 1256 contracts at the end of the year. If so, they’re treated as if they were sold at their fair market value (FMV) on the last business day of the year. This applies even though you still owned the contracts.

Gains and losses from the open contracts are recorded as 60% long-term and 40% short-term. This applies no matter how long you held the contracts. When the Section 1256 contract ends, the gain or loss is adjusted for the previous gain or loss

Section 1256 contracts include:

  • Regulated futures contracts, like commodities futures
  • Foreign-currency contracts that are publicly traded
  • Nonequity options
  • Dealer-equity options
  • Dealer securities futures contracts

Use Form 6781, Part I to report the gains and losses on open Section 1256 contracts.

A straddle is when you hold contracts that offset the risk of loss from each other. You might realize a loss when you sell part of a straddle position. If so, your loss will be limited to the amount of any unrecognized gain in the offsetting position. Any loss you can’t currently deduct is carried over to the next tax year. Straddle-loss rules and exceptions are quite complicated.

To learn more on reporting straddle losses, see:

  • Form 6781 instructions
  • Publication 550: Investment Income and Expenses

Related Topics

Related Resources

Does my federal Form 8379: Injured Spouse Allocation apply to my state return in addition to my federal return?

Learn whether federal Form 8379: Injured Spouse Allocation applies to your state tax return from the tax experts at H&R Block.

If I sold some employee stock shares through an online brokerage and taxes were taken out at the time of the sale, do I

If you sold stock through an online brokerage and had taxes withheld, you'll need to use Form 8949. Learn more from the tax experts at H&R Block.

My spouse and I sold our home in a short sale. We received two 1099-C short sale forms. Both 1099-C Form short sale docu

Did you and your spouse both receive a Form 1099-C after a short sale? Learn more from the tax experts at H&R Block.

How should I claim my W-4 allowances? If I claim more exemptions than I actually have on my W-4, will it make a big dif

If you claim more allowances than you actually have on your w-4, will it makes a large difference in the taxes you owe? Learn more from the tax expert