Explain the 60/40 Rule in Detail.
The 60/40 rule is a tax provision for Section 1256 contracts where 60% of the net gain or loss is treated as long-term capital gain or loss, and the remaining 40% is treated as short-term capital gain or loss. This blend is often advantageous because the long-term portion is taxed at a lower rate than the short-term portion, which is taxed at ordinary income rates.
It applies regardless of how long the contract was held.
Glossar
Tax Provision
Accounting ⎊ This represents the amount recorded on an entity's financial statements to reflect the estimated tax expense attributable to current period income, including realized and unrealized derivative gains.
60/40 Rule
Allocation ⎊ ⎊ The 60/40 Rule, within cryptocurrency and derivatives markets, represents a portfolio construction strategy prioritizing capital preservation alongside moderate growth potential, typically allocating sixty percent to lower-risk assets and forty percent to higher-risk opportunities.
Section 1256
Standardization ⎊ This specific tax code provision mandates special treatment for certain regulated futures contracts, which can apply to crypto derivatives traded on designated exchanges under specific conditions.
Cryptocurrency Options
Volatility ⎊ Cryptocurrency options, fundamentally derivatives, grant the holder the right, but not the obligation, to buy or sell a specified cryptocurrency at a predetermined price on or before a specific date.
Section 1256 Contracts
Taxation ⎊ Section 1256 Contracts, within the context of cryptocurrency derivatives and options, denote financial instruments specifically designated under Section 1256 of the Internal Revenue Code, resulting in a present value treatment of gains and losses as ordinary income or loss rather than capital gains or losses.