The 60/40 Rule: Why Futures and Index Option Traders Can Pay Less Tax Than Stock Traders
Two traders pocket the same short-term gain, hold their positions for the same number of weeks, and then face completely different tax bills at filing time. The gap comes down to a single section of the tax code that most…
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
Picture two retirees. Neither is a real person, but the tax treatment is real. Each makes the same profit on a trade held a few weeks. One bought shares of stock. The other traded a stock index futures contract. At filing time, those same gains land in different categories, and the futures trader can come out ahead.
The reason is Section 1256 of the Internal Revenue Code, better known as the 60/40 rule. It treats most of a gain on futures or broad index options as long-term, however briefly the position was held. Here’s how it works, and where it stops working.
Which Contracts Qualify for Section 1256 Treatment
Under 26 U.S.C. § 1256(b)(1), a section 1256 contract is any of five things: a regulated futures contract, a foreign currency contract, a nonequity option, a dealer equity option, or a dealer securities futures contract. IRS Publication 550, Investment Income and Expenses, gives the same list in its “Section 1256 Contracts Marked to Market” discussion (2025 edition).
A regulated futures contract trades on an exchange. The money you must deposit in your margin account, or can take out of it, moves with daily market prices. Publication 550 calls this a system of “mark to market” (Publication 550). A nonequity option is any listed option that isn’t an equity option (§ 1256(g)(3)). Publication 550 explains that cash-settled options on a stock index count as nonequity options once the SEC determines the index is broad based (Publication 550).
Options on individual stocks are equity options (§ 1256(g)(6)), so average investors can’t use the rule for them. The two dealer categories apply only to professional dealers.
How the 60/40 Split Rewrites a Short-Term Gain
Under § 1256(a)(3), 60% of any gain or loss counts as long-term and 40% counts as short-term. Publication 550’s holding period rules say the split applies “regardless of how long the contracts were held.” A contract held for an afternoon gets the same treatment as one held for years.
Stock follows a different rule. Under Publication 550, a stock gain is long-term or short-term “depending on whether you held the stock more than 1 year.” Sell before that point and the whole gain is short-term.
The label sets the rate. Publication 550 says the rates on net capital gain “are generally lower than the tax rates that apply to other income.” Those lower rates don’t apply to short-term gains. The stock trader pays regular income tax rates on the entire gain. The futures trader pays them on only the short-term piece. The resulting blended rate depends on your bracket.
| Feature | Stock held 1 year or less | Section 1256 contract |
|---|---|---|
| Character of gain | All short-term | 60% long-term, 40% short-term |
| Holding period matters | Yes | No |
| Taxed at year-end if still open | No | Yes |
| Reporting form | Form 8949 | Form 6781, Part I |
Fine Print That Cuts Both Ways
Losses get the same 60/40 split. Individuals can also choose to carry a net section 1256 contracts loss back to earlier years, and the loss keeps its split there too (§ 1212(c)(6)).
The bigger catch is the mark-to-market rule. Under § 1256(a)(1), a contract still open at year-end is treated as sold at its closing price on the last business day of the year. In plain terms, you can owe tax on a paper gain you never cashed in. Section 1256(a)(2) then adjusts the later gain or loss so the same dollars aren’t taxed twice.
There’s an upside, too. Normally you can’t claim a loss if you buy back substantially same securities around the time of the sale. That rule doesn’t apply to losses created by the year-end marking (§ 1256(f)(5)).
Hedging transactions fall outside the rule if you identify them as hedges before the close of the day you enter them (§ 1256(e)). Publication 550 says to report section 1256 results in Part I of Form 6781, including the amount in box 11 of Form 1099-B.
Where the 60/40 Rule Stops Applying
Single-stock options don’t qualify. Swaps are out as well. Section 1256(b)(2)(B) excludes interest rate, currency, commodity, equity, equity index and credit default swaps, among others.
Prediction market event contracts sit in a gray zone. No IRS notice, revenue ruling, revenue procedure or publication specifically addresses how they’re taxed (per our review of IRS guidance). They also don’t appear on Publication 550’s list of section 1256 contracts. Don’t assume 60/40 applies to them.
Aggressive uses of the rule are getting attention. In Notice 2026-62, Treasury and the IRS described fund strategies that pair futures with offsetting contracts to book 60/40 capital gains against average losses. The agencies said any resulting guidance could apply retroactively. Comments were due October 28, 2026.
Who Should Care About Section 1256 Before Year-End
The rule matters most to active traders who close positions within a year in taxable brokerage accounts. That includes retirees and near-retirees who manage their own money. Gains inside an IRA or 401(k) aren’t taxed when you realize them, so the split doesn’t help there.
The benefit also has limits. A stock investor who holds shares more than a year gets fully long-term treatment, which beats 60/40. Year-end marking can also push income into a year you didn’t plan for, and that matters if you’re watching bracket thresholds or Medicare premium tiers (IRMAA surcharges tied to income from two years ago are one of several traps we mapped in a free Medicare guide).
Derivatives taxation is a specialty. Before you change how you trade, run the numbers with a tax professional who regularly works with futures and options.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
