Section 1256 Contracts: How the 60/40 Capital Gains Tax Rule Works

Section 1256 contracts get a special tax split. Any gain or loss is treated as 60% long-term and 40% short-term, no matter how long you actually held the position. This is the 60/40 rule. On top of that, these contracts are marked to market at year end, which means open positions are treated as if you sold them on the last trading day, so the gain or loss is taxed even if you never closed the trade. The 60/40 blend gives an effective top federal rate well below the 37% that pure short-term trading would draw, which is why active futures and index-option traders care about it. Not every trading instrument qualifies, so the contract type has to be confirmed.

What Section 1256 contracts are

Section 1256 covers specific exchange-traded instruments, including regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options, and broad-based stock index options. The common thread is that they trade on or are subject to the rules of a qualified board or exchange. Single-stock options and ordinary shares are not Section 1256 contracts, and most spot crypto trades are not either. The classification turns on the instrument, not on your trading style.

Why the 60/40 split matters

Normal short-term trading is taxed entirely at ordinary rates, up to 37%. Section 1256 instead treats:

• 60% of the gain as long-term, taxed at the lower 0%, 15%, or 20% rates,
• 40% of the gain as short-term, taxed at ordinary rates.

Blend those together and the top effective federal rate on a Section 1256 gain works out well under the 37% ordinary ceiling. A trader who closes hundreds of positions a year, none held longer than a few weeks, still gets long-term treatment on 60% of the net result.

Holding period does not control the split

This is the surprise for investors used to normal stock rules. With a regular stock, the long-term or short-term character depends entirely on whether you held it more than a year. With a Section 1256 contract, the 60/40 split is automatic. A position held for three days and a position held for ten months both split the same way. The calendar does not change the character.

Mark-to-market at year end

Section 1256 positions still open on December 31 are treated as sold at their year-end fair market value and reopened at that value. You report the resulting gain or loss for the year even though the position is still live. This pulls unrealized gains into the current year and resets the basis going forward.

A worked example: a $100,000 net Section 1256 gain

Take a single filer with $180,000 of other taxable income and a $100,000 net Section 1256 gain. We ran it through the Capital Gains Calculator.

• 60% long-term: $60,000. Taxed at the 15% long-term rate, that is $9,000.
• 40% short-term: $40,000. Stacked on the $180,000 of income, it spans the 24% and 32% brackets for a tax of $11,058.
• The 3.8% NIIT then applies, adding $3,040.
• Total federal tax: $23,098 on the $100,000 gain.

The same $100,000 taxed entirely as short-term gain would have cost noticeably more, because all of it would sit in the 24% and 32% ordinary brackets with none getting the 15% long-term rate. The 60/40 split is what creates the saving.

Use the Capital Gains Calculator and enter your figure in the §1256 field to see your own 60/40 split.

Form 6781 and a word of caution

Section 1256 gains and losses are reported on Form 6781, which is where the 60/40 split and the mark-to-market totals are calculated before they flow to Schedule D. Before you rely on 60/40 treatment, confirm that your specific contracts actually qualify as Section 1256 contracts. Brokers usually flag this on your 1099-B, but the edges are genuinely tricky, especially for newer products and anything that looks like an option but trades differently. When in doubt, confirm your Form 6781 treatment with a tax professional rather than assuming.

Open the Capital Gains Calculator to model a §1256 position alongside your other gains.

Related guides

• Short-term vs. long-term capital gains tax rates
• Tax-loss harvesting, the $3,000 deduction, and carryforwards
• 2026 capital gains tax brackets

Sources

• IRS, Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
• IRS, Topic No. 409, Capital Gains and Losses
• IRS, Schedule D (Form 1040), Capital Gains and Losses

Last reviewed: June 21, 2026.

Frequently Asked Questions

What is the 60/40 rule for Section 1256 contracts?

The 60/40 rule treats any gain or loss on a Section 1256 contract as 60% long-term and 40% short-term, regardless of how long you held the position. The long-term portion gets the lower 0%, 15%, or 20% rates, and the short-term portion is taxed at ordinary rates.

Do I owe tax on Section 1256 positions I have not sold?

Yes. Section 1256 contracts are marked to market at year end, so open positions are treated as sold on the last trading day at fair market value. You report that gain or loss for the year even though the position is still open.

Are stock options Section 1256 contracts?

Usually not. Single-stock equity options are generally not Section 1256 contracts. The category covers regulated futures, broad-based index options, and similar exchange-traded instruments. Confirm the classification on your 1099-B and Form 6781 before claiming 60/40 treatment.