Under the Mark to Market rules, each section 1256 contract held at year end is treated as if it were sold at fair market value (FMV) on the last business day of the tax year. (wash sale rules don’t apply) Gains or losses on section 1256 contracts open at the end of the year (or terminated during the year) are treated as 60% long term and 40% short term, without regard to how long the contracts were held.
What is a Section 1256 Contract?
A section 1256 contract is any:
- Regulated futures contract
- Foreign currency contract
- Nonequity option
- Dealer equity option
- Dealer securities futures contract
You can refer to Publication 550 for additional information.
How do I make the Mark to Market Election?
You must make the mark-to-market election by the original due date (not including extensions) of the tax return for the year prior to the year for which the election will become effective. You can make the election by attaching a statement either to your income tax return or to a request for an extension of time to file your return. The statement needs to include the following information:
- That you're making an election under section 475(f)
- The first tax year for which the election is effective (the tax year for which a timely election is being made)
- The trade or business for which you're making the election.
This statement would not be able to be attached to your e-filed return, so you will need to print and mail the return attaching the appropriate statement.
How do I report the yearly profit or loss on my Section 1256 Contracts?
Form 6781 is used to report the aggregate gain/loss from section 1256 contracts.
To locate and complete this form in the program log in and click on:
- Federal
- Income - Select my forms
- Less Common Income
- Gains and Losses From Section 1256, 6781
- Your amount falls under the "Net Sec 1256 Contracts Loss"
- Contracts Marked to Market (Section 1256)