What Is a Section 1256 Contract and How Does Its Tax Treatment Differ from Regular Stock Trading?

A Section 1256 contract is a regulated futures contract, foreign currency contract, or non-equity option. Its tax treatment is unique because all gains and losses are subject to the 60/40 rule, meaning 60% is taxed as long-term capital gain and 40% as short-term, regardless of the holding period.

Regular stock trading requires a holding period of over one year for long-term treatment, and short-term gains are taxed at ordinary income rates. This provides a significant tax advantage for short-term derivatives traders.