Section 1256 of the Internal Revenue Code covers certain regulated futures, foreign currency contracts, nonequity options, dealer equity options, and similar contracts. Eligible positions are generally marked to market at year-end: unrealized gain or loss is treated as if you sold at fair market value on the last business day, then basis resets. Character is often the famous 60% long-term / 40% short-term blend—even if you held the contract for a day. Orientation beside equity options: Options trading tax basics. Account shell: Taxable brokerage account basics. Filing workflow: Filing taxes for beginners.
This is not the Section 475 trader mark-to-market election. Different statute, different forms.
What the 60/40 mark usually means
| Piece | Typical 1256 treatment (confirm Pub / broker docs) |
|---|---|
| Year-end open contracts | Deemed sold at FMV; gain/loss recognized |
| Character split | Often 60% long-term, 40% short-term capital |
| Form | Frequently summarized on Form 6781; flows to Schedule D / Form 8949 per instructions |
| Holding period | The 60/40 blend can apply without meeting the one-year long-term test that equity shares use (Holding periods) |
| Wash-sale overlay | Special interactions exist; do not assume equity wash-sale habits copy 1:1 |
Brokers such as Fidelity, Charles Schwab, E*TRADE (Morgan Stanley), Interactive Brokers, and tastytrade often ship a 1256 supplement with the consolidated 1099. Trust that coding over a forum guess that “any index option is 1256.”
What usually is vs is not Section 1256
| Often in the 1256 bucket (examples; product-specific) | Usually not automatic 1256 |
|---|---|
| Many broad-based index options and regulated futures on qualified exchanges | Single-stock equity options (calls/puts on one company) |
| Certain qualifying nonequity options | Most stock ETF options that the broker reports as equity options |
| Some foreign currency contracts meeting the definition | Crypto spot, most equity shares, mutual fund shares |
| Dealer equity options in dealer hands | Your retail covered call on AAPL reported as an equity option |
If Schwab marks a line “1256,” keep the PDF. If Fidelity lists the same underlier as an equity option, do not hand-split 60/40 in TurboTax. Product design and exchange listing drive the category—not the word “index” in a marketing name.
Investing orientation (not tax advice): Investing basics for beginners. Offset legs can still trip straddle rules.
Worked example: $1,000 marked gain
Riley closes the year with an open broad-based index option that Interactive Brokers reports as a Section 1256 contract. Mark-to-market gain on Dec 31 is $1,000 (illustrative).
- Rough character: $600 long-term, $400 short-term (60/40).
- Riley’s software expects Form 6781 detail from the broker, not a DIY equity Form 8949 line labeled “1256 vibes.”
- On Jan 1 the basis resets as if Riley repurchased at the year-end mark; later sale uses that new basis.
Compare: a $1,000 gain on a single-stock put held 11 days is typically 100% short-term—no 60/40 gift. Mixing the two categories on one Schedule D is a common DIY error.
Practical cues
- Export the broker’s 1256 / Form 6781 worksheet with your 1099 every year.
- Do not force 60/40 onto equity options to “optimize” tax.
- Budget cash for tax on unrealized year-end marks—1256 can create tax without a closing trade.
- Separate Section 475 trader MTM elections from statutory 1256; talk to a pro before any election.
- Watch multi-leg overlays for straddle and reporting complexity.
- Confirm current IRS Publication 550 language; contract lists evolve.
Checklist
- Identify which products your broker codes as Section 1256.
- Keep year-end mark statements with the return.
- Enter 60/40 through Form 6781 (or software equivalent), not by relabeling stock trades.
- Estimate April tax using both realized trades and year-end marks.
- Reconcile basis after the Jan 1 reset on still-open contracts.
- Use a qualified tax professional for high-volume futures/options years.
Section 475(f) securities trader mark-to-market election (different from 1256): Mark-to-market trader election basics.
Educational only. Not tax, legal, or investment advice. Futures and options involve substantial risk of loss. Section 1256, Form 6781, and related rules are complex and change; confirm with current IRS materials, broker tax documents, and a qualified professional.