How are Futures Taxed? | Taxes on Futures Explained
Taxes on futures come with more benefits than equity due to the section 1256 tax code.
Key Takeaways
Futures contracts are financial instruments that allow investors to buy or sell an underlying asset at a predetermined price and date in the future.
In some cases, futures trading may be subject to other taxes, such as the Section 1256 mark-to-market tax, which provides traders with tax advantages.
How are Futures Taxed?
As a result of the IRS categorization of markets like futures under Section 1256, the calculation of capital gains and losses is based on a 60% long-term and 40% short-term ratio.
The same rules apply to futures options and index options.
Long-Term Capital Gains Tax
Depending on your income, the long-term capital gains tax rate is either 0%, 15%, or 20%.
60% of futures profit will be taxed at these rates, while the other 40% will be taxed at your regular income tax rate.
Wash Sale Rules and Futures
Futures trading is not subject to the wash sale rule.
The wash sale rule is a tax rule that prohibits individuals from claiming a loss on the sale of a security if they repurchase the same or substantially similar security within 30 days before or after the sale.
Deducting Capital Losses From Futures
If you take a loss trading futures, you can deduct up to $3,000 of capital losses per year from your taxable income.
How are Stocks Taxed?
In the United States, stocks are taxed as capital gains or losses. Capital gains are the profits earned from selling stocks that have increased in value.
Capital losses are the losses incurred from selling stocks that have decreased in value.
Any capital gains made by selling a stock held for less than a year are regarded as short-term gains and are taxed at the individual's regular income tax rate.
Any capital gains made by selling a stock that has been owned for more than a year are regarded as long-term and are taxed at a lower rate.
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