Exchange traded funds (ETFs) are becoming more and more popular. Did you know that ETF options can have special tax handling? Some of these options qualify as section 1256 contracts. Under Section 1256 the gains and losses are treated as 60% long-term and 40% short-term capital gains/losses, regardless of the holding period. What qualifies an ETF option as Section 1256 depends on it's structure and whether the option is listed or over-the-counter.
If you want to read an in-depth discussion of what makes an ETF option a section 1256 contract we recommend you check out this link to Twenty-First Securities Corporation: "How Are Your ETF Options Taxed?"
Most brokers do not identify and report ETF Options that qualify for section 1256 treatment. TradeLog includes default settings to automatically classify section 1256 contracts for proper tax handling when importing the trade history from your online broker. Recently those default settings were updated to include ETF options that qualify for section 1256 treatment.
TradeLog User Tip: If you are a current TradeLog user you will want to update your broad-based index options settings to reflect these recent changes. Click here and follow the instructions to restore defaults.
Based on IRS rules, section 1256 contracts must be marked-to-market at year end. TradeLog's MTM version provides the functions needed for this special year-end accounting. Click here to learn more about how TradeLog handles section 1256 accounting. TradeLog MTM version also provides an easy-to-use report which provides the totals you need for completing IRS Form 6781 - which is where you report section 1256 contracts.
You can learn more about why active traders use TradeLog at www.tradelogsoftware.com. And if you currently trade ETF options don't delay in using TradeLog to benefit fully from qualified section 1256 contracts!
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.