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((More citations needed|date=March 2009))

A '''1256 Contract''', as defined in section 1256 of the U.S. [[Internal Revenue Code]], is any regulated [[futures contract]]s, [[foreign currency]] contracts, non-[[Equity (finance)#Equity investments|equity]] [[Option (finance)|option]]s (broad-based stock index options (including cash-settled ones), debt options, commodity futures options, and currency options), [[dealer equity option]]s, and any dealer security futures contracts.<ref>((cite web|title=Section 1256 Contracts Marked to Market|url=https://www.irs.gov/publications/p550/ch04.html#en_US_2010_publink100010326|publisher=[[Internal Revenue Service]]|accessdate=16 April 2011| archiveurl= https://web.archive.org/web/20110520205845/https://www.irs.gov/publications/p550/ch04.html|archivedate=20 May 2011 ))</ref><ref>((cite web|title=TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter P > PART IV > § 1256|url=https://www.law.cornell.edu/uscode/text/26/1256-|work=U.S. Code|publisher=[[Cornell Law School|Cornell University Law School]], Legal Information Institute|accessdate=16 April 2011))</ref> For U.S. Federal income tax purposes, [[mark-to-market accounting]] is used for each 1256 contract as of the end of each tax year,<ref>((cite web|title=Section 1256 Contract|url=http://www.investopedia.com/terms/s/section-1256-contract.asp|publisher=Investopedia|accessdate=16 April 2011))</ref> and such contracts are treated as sold for its fair market value on the last business day of such taxable year (i.e., as "closed").<ref>((Cite web |title=26 US Code Section 1256 |url=https://www.law.cornell.edu/uscode/text/26/1256))</ref>

The [[Internal Revenue Service]] (IRS) is not clear on whether [[Invesco PowerShares|QQQ]], [[Dow Jones Industrial Average#Exchange-traded fund|DIA]] and [[SPDR_S%26P_500_Trust_ETF|SPY]] options should be treated as section 1256 contracts.<ref>"These final regulations do not provide substantive rules on index options. Rather, to determine whether an index substantially all the components of which are specified securities is a broad-based index under section 1256(g)(6)(B), a broker must look to rules established by the Securities Exchange Commission and the Commodities Futures Trading Commission that determine which regulator has jurisdiction over an option on the index."  https://www.irs.gov/irb/2013-20_IRB/ar07.html</ref>  On one hand, these are seen as equity options, not within the definition of a 1256 Contract, but others consider them as non-equity option and meeting the definition of a "broad-based" index option.<ref name="CFTC">((cite web|title=Synopsis: CFTC/SEC Agreement to Reform Shad-Johnson Accord|url=http://www.cftc.gov/opa/press00/opasynposis.htm|website=CFTC.gov|publisher=[[Commodity Futures Trading Commission]]|accessdate=2019-03-14))</ref> Instead, the IRS grants penalty relief if a broker determines in good faith that an index is, or is not, a narrow-based index, following published guidelines.<ref name="CFTC" />

==Tax advantages==
Any gain or loss from a 1256 Contract is treated for tax purposes as 40% short-term gain and 60% long-term gain, regardless of holding period. Because most [[futures contract]]s are held for less than the 12-month minimum holding period for long-term capital gains tax rates; the gain from any non-1256 contract will typically be taxed at the higher short-term rate. Thus the 1256 Contract designation enhances the marketability based on the after-tax attractiveness of these products. The reason for the implementation of section 1256 was the fact that traders were hedging their short term futures contracts (going long and short at the same time) to transition to the next tax year without paying the short-term capital gains tax on these positions, and were effectively making these positions qualify for long-term tax treatment.

Individuals with a net Section 1256 contract loss can elect to carry it back three years (instead of being carried forward to the following year), starting with the earliest year, but only to a year in which there is a net Section 1256 contracts gain, and only up to the extent of such gain (the carrying back cannot produce a net operating loss for the year).<ref>((cite web |title=1212(c) Carryback of losses from section 1256 contracts to offset prior gains from such contracts |url=https://www.law.cornell.edu/uscode/text/26/1212 |accessdate=16 April 2017 |website=26 U.S. Code § 1212 - Capital loss carrybacks and carryovers |publisher=[[Legal Information Institute]]))</ref><ref>((cite web|title=Gains and Losses From Section 1256 Contracts and Straddles|url=https://www.irs.gov/pub/irs-pdf/f6781.pdf|website=Form 6781|publisher=[[Internal Revenue Service]]|accessdate=16 April 2017))</ref> To carry your loss back, file Form 1045, Application for Tentative Refund,<ref>((cite web|title=Form 1045, Application for Tentative Refund|url=https://www.irs.gov/uac/about-form-1045|website=IRS.gov|publisher=[[Internal Revenue Service]]))</ref> or an amended return. Attach an amended Form 6781 and an amended Schedule D (Form 1040) for the applicable years.<ref>((Cite web |title=2021 Form 6781 |url=https://www.irs.gov/pub/irs-pdf/f6781.pdf))</ref>

==See also==
* [[99-year lease]]
* [[Securities Exchange Act]]

==References==
((Reflist))

[[Category:Derivatives (finance)]]
[[Category:United States federal income tax]]

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