The Tax Consequences of Holding Futures Into Next Year

by Amanda McMullen

When you trade futures and you incur a gain or loss, you typically must report the gain or loss on your income taxes. If you sell futures in the same year that you purchased them, you report a gain or loss for that tax year only. However, if you hold futures into the next year, you must report a gain or loss for the year of purchase and for the year that you sell them.

About Futures

A future is a contract that requires the holder to purchase assets or items named in the contract for a specific price on a predetermined future date. The buyer enters into this contract because he believes the commodity or security will cost more than the specified price when the contract matures. Because traders of commodities futures aren't usually interested in actually receiving the asset or item, they usually sell the contract to another trader before it reaches maturity. However, securities traders sometimes hold contracts until they mature.

Taxing of Futures

All regulated futures qualify as Section 1256 contracts. The IRS considers 60 percent of the capital gains or losses on Section 1256 contracts to be long-term gain or loss, and it considers the remaining 40 percent to be short-term gain or loss. Securities futures do not qualify as Section 1256 contracts. The IRS taxes the capital gain or loss from the sale of securities futures in the same way that it would tax gains or losses on the sale of the underlying commodity.

Holding Futures

If you are holding a Section 1256 future at the end of the tax year, you must report capital gains or losses as if you sold the future for its fair market value on the year's final business day. Holding securities futures into the next year won't usually affect your income. However, you must report any capital gain or loss from the contracts during the year that you sell them.

Example

If you purchased a regulated futures contract during the year for $60,000 and you are still holding it on the last day of the year, you must report a capital gain or loss on the contract for that tax year. If the fair market value of the contract on the last business day of the year is $56,000, then you incurred a $4,000 capital loss. The IRS will treat 60 percent of this loss, or $2,400, as a long-term loss. The remaining 40 percent, or $1,600, is a short-term capital loss.

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