How Are Futures Taxed? Futures Trading Taxes Explained

Futures trading comes with many benefits, like low capital requirements, high leverage, and access to major global markets. But if you’re trading U.S. futures, it’s just as important to understand how futures trading taxes work.

The tax treatment of futures contracts is unique. Unlike stocks or crypto, futures fall under special rules in the U.S. tax code that may be favorable for active traders. In this guide, we’ll break down how futures are taxed, how to report your gains and losses, and how these rules compare to other assets.

Disclaimer: This article is for general informational purposes only and does not constitute tax advice. Consult a licensed tax professional for guidance on your personal tax situation.

Key Takeaways

• U.S. futures are typically taxed under Section 1256 of the Internal Revenue Code.

• Profits are taxed using the 60/40 capital gains rule, regardless of how long the position was held.

• All open futures positions are marked to market at year-end for tax purposes.

• Futures traders receive Form 1099-B from brokers and report trades using Form 6781 and Schedule D.

• Futures taxes are often more favorable than taxes on stocks, crypto, or short-term options.

What Are Section 1256 Contracts?

Most major futures contracts traded on U.S. exchanges like the CME Group are considered Section 1256 contracts. This classification comes from Section 1256 of the Internal Revenue Code, which provides special tax rules for certain types of derivatives.

Instruments Covered Under Section 1256:

• Regulated futures contracts (RFCs) traded on U.S. exchanges

• Broad-based stock index futures, such as S&P 500 or Nasdaq-100

• Foreign currency contracts that meet IRS definitions

• Non-equity options, like index options or commodity options

• Nonequity swaps and dealer equity options (less common)

If you’re trading contracts like the E-mini S&P 500 (ES), Micro Nasdaq-100 (MNQ), Micro Crude Oil (MCL), or Gold Futures (GC), you’re likely dealing with Section 1256 contracts.

This is important because Section 1256 contracts are taxed using a special rule known as the 60/40 capital gains rule, which may result in lower tax liability for many traders.

How Are Futures Gains and Losses Taxed?

The defining feature of futures taxation is the 60/40 rule, which allows for a split treatment of gains:

• 60% is taxed at long-term capital gains rates

• 40% is taxed at short-term capital gains rates

This split applies regardless of your holding period. Even if you only held a futures position for a few minutes, you still receive the blended 60/40 treatment.

Example:

Let’s say you earn $20,000 in profit trading futures during the year. Under Section 1256:

• $12,000 (60%) is taxed at long-term capital gains rates (which max out at 20%)

• $8,000 (40%) is taxed at short-term capital gains rates (which can be as high as 37%)

This blended rate can significantly reduce your tax bill compared to stock trading, where holding for less than one year means 100% of your gains are considered short-term capital gains and are taxed as ordinary income.

What Is Mark-to-Market Accounting?

Another unique feature of futures trading taxes is the mark-to-market (MTM) rule.

Under this rule, all open futures positions are treated as if they were sold at their fair market value on the last trading day of the year—usually December 31. This means any unrealized gains or losses are recognized as part of your taxable income.

You must report the value of your account as if you had closed all positions, even if you still hold them the next day.

Why MTM Matters:

• You don’t defer taxes by holding open positions

• All profits and losses are recognized in the current tax year

• It simplifies reporting because there’s no need to track individual entry and exit dates

MTM Example:

If you opened a Micro S&P 500 (MES) long position in early December and it increased by $2,000 by year-end, you would owe taxes on that $2,000, even if you didn’t close the trade.

MTM gains and losses are reported using Form 6781, which we’ll cover next.

How to Report Futures Trades on Your Taxes

Futures traders have a relatively straightforward reporting process, especially compared to traders in stocks or crypto.

Tax Forms You’ll Likely Use:

1. Form 1099-B: Issued by your broker. Summarizes your total gains or losses from Section 1256 contracts for the year.
2. Form 6781: IRS form used to calculate your net gain or loss on Section 1256 contracts and apply the 60/40 split.
3. Schedule D: The capital gains schedule on your 1040. This is where the totals from Form 6781 are included in your return.

Reporting Process:

1. Get your 1099-B from your futures broker.
2. Enter the totals from the 1099-B into Form 6781, applying the 60/40 rule.
3. Transfer the final result to Schedule D, where it’s included in your overall tax return.

This process eliminates the need to track every single trade, which is especially helpful for active traders who may execute hundreds of contracts per month.

Tax Advantages of Futures Trading

There are several reasons why traders consider futures a tax-efficient investment:

1. Blended Tax Rate

Thanks to the 60/40 rule, many traders pay less overall tax on futures than on short-term stocks or options.

2. Mark-to-Market Simplifies Reporting

You don’t need to keep track of individual trades. All gains and losses are calculated based on year-end value.

3. Wash Sale Rule Doesn’t Apply

The IRS wash sale rule doesn’t apply to Section 1256 contracts. That means you can sell a contract at a loss and buy it back immediately without losing the deduction.

4. Capital Loss Carryforward

If you have a net capital loss, you can use it to offset other capital gains, or carry it forward to future years. The IRS allows up to $3,000 per year in capital losses to be used against ordinary income.

What Happens If You Have a Losing Year?

Futures traders can and do experience years with net losses. Fortunately, futures trading losses are deductible within certain limits.

Here’s how it works:

• If your total loss from Section 1256 contracts exceeds your gains, you’ll report a net capital loss on Form 6781.

• Up to $3,000 of this loss can be used to reduce ordinary income (if you have no other gains).

• Any remaining loss can be carried forward to future tax years indefinitely.

This is a key difference from tax treatment of day trading stocks, where the wash sale rule and holding period requirements can restrict when and how losses are applied.

Special Tax Considerations for Futures Traders

While the basics of futures taxes are relatively straightforward, there are some advanced situations where rules may vary.

Trading Through an Entity

Some traders operate through an LLC, S-Corp, or partnership for tax planning reasons. These setups may allow for business deductions or retirement contributions, but they require more complex filings.

Trader Tax Status (TTS)

If you meet certain IRS criteria, you may qualify for Trader Tax Status, which may allow you to deduct expenses like trading software, data feeds, home office space, or education.

Note: TTS does not change the way Section 1256 contracts are taxed, but it may impact other deductions.

Estimated Tax Payments

Futures profits are subject to capital gains tax. If you expect to owe more than $1,000 in taxes, the IRS may require you to make quarterly estimated payments (Form 1040-ES).

State Taxes

While federal rules apply nationwide, state-level tax laws vary. Some states may not recognize Section 1256 treatment or may tax futures differently.

How Futures Taxes Compare to Other Assets

To put futures taxation in context, here’s how it compares to other common asset classes:

As you can see, futures trading offers unique tax benefits that are especially attractive to active and short-term traders.

Getting Help with Futures Taxes

While futures taxation may be simpler than other asset classes, it’s still a good idea to work with professionals, especially if:

• You’re trading full-time

• You had complex gains or losses

• You want to deduct trading expenses or form a business entity

Tools and Resources:

• CPAs with trading experience

• Tax software that supports Form 6781 (e.g., TurboTax Premier, TaxAct)

• Trader tax firms, such as GreenTraderTax or TraderStatus

Conclusion

Understanding how futures are taxed can make a major difference in how you approach trading. With the Section 1256 60/40 rule, mark-to-market accounting, and simpler reporting, futures traders may enjoy a more efficient tax process compared to other types of investors.

Before filing your taxes, make sure you’ve collected the right forms, recorded your gains and losses, and—if needed—talked to a tax pro. At MetroTrade, we provide transparent reporting and easy access to the tax documents you need, so you can stay focused on what matters most: trading smarter.

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The content provided is for informational and educational purposes only and should not be considered trading, investment, tax, or legal advice. Futures trading involves substantial risk and is not suitable for every investor. Past performance is not indicative of future results. You should carefully consider whether trading is appropriate for your financial situation. Always consult with a licensed financial professional before making any trading decisions. MetroTrade is not liable for any losses or damages arising from the use of this content.