Section 1256 contracts

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Section 1256 Contracts

Investments that fall under Section 1256 of the U.S. Tax Code, namely, any regulated futures contract, any foreign currency contract, any non-equity option, any dealer equity option, and any dealer securities futures contract. Section 1256 contracts are treated differently from other securities for tax purposes. Specifically, rather than waiting to tax them until they are sold, Section 1256 contracts are treated as if they were sold at market value on the last day of the tax year. This means that one may be liable for capital gains taxes on a Section 1256 contracts even though the positions are still open. See also: Form 6781.

Section 1256 contracts

Any of several types of futures and options contracts that are subject to a special tax rule of the Internal Revenue Service. Named for a section of the IRS Code, these contracts must generally be treated as if they are sold at fair market value on the last business day of the tax year. Section 1256 contracts include regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts.
References in periodicals archive ?
On July 10, 1985, A enters into an offsetting section 1256 contract and makes a valid election to treat the straddle as a section 1092(b)(2) identified mixed straddle.
A forward contract in any minor currency will not be a section 1256 contract because no regulated futures contracts in any minor currency trade on any exchange; thus, it will not be subject to any mark-to-market requirement.
in which at least one (but not all) of the positions is an IRC Section 1256 contract, and
To accomplish this, any IRC Section 1256 contract that has not been terminated or transferred before the end of the tax year is treated as if it were sold for its fair market value on the last business day of that year.
A taxpayer other than a corporation, estate or trust (section 1212(c)) may elect to carry back a "net section 1256 contracts loss" to each of the three taxable years preceding the loss year to offset any net section 1256 contract gain in those years.
Although IRC Section 1256 contracts are excluded from the definition of an appreciated financial position under IRC Section 1259(b)(2)(B) (see Q 7708) depending on the taxpayer's other holdings, it would appear that a constructive sale could result from entering into an IRC Section 1256 contract to deliver property that is the same as or substantially identical to an appreciated financial position held by the taxpayer.
PROPERTY SUBJECT TO STRADDLE RULES Section 1256 Contracts Non-Section 1256 Property Regulated futures contracts Stock options Nonequity option contracts (see Q 1068) Other equity options (see Q 1067) Foreign currency contracts Direct ownership of stock--but only when Dealer equity options at least one offsetting position is: 1) an option (other than a qualified covered call option) on such stock or on substantially similar stock or securities; 2) substantially similar property; or 3) stock of certain corporations which take positions that offset positions held by Shareholders (see Q 1078) Forward contracts Other actively traded personal property which is not a Section 1256 contract Securities futures contracts (see Q 1072)
Andrea Kramer of McDermott Will & Emery LLP discusses popular financial products and their uses; section 1256 contracts and the tax straddle rules; the mark-to-market rules; the special rules for commodities derivatives dealers; the tax treatment of supplies and tax hedges; and the effect Dodd-Frank has on certain popular financial products.
These options are considered "IRC Section 1256 contracts.
The taxpayers took the position that because the euro is a "major" currency traded on the interbank market, its options are section 1256 contracts that must be marked to market (allowing them to recognize a loss), and because the krone is a "minor" currency its options are not section 1256 contracts and are not marked to market (enabling them to avoid recognizing a gain).
Taxation as a Financial Instrument: Section 1256 Contracts
Five forms (Schedule J; Forms 8271, Investor Reporting of Tax Shelter Registration Number; 8582-CR, Passive Activity Credit Limitation; 6781, Gains and Losses from section 1256 Contracts and Straddles; and 8586, Low-Income Housing Credit) will be added to e-filing for the 2000 filing season.