What Is the Difference between Capital Gains and Ordinary Income in Derivatives Trading?

Capital gains result from the sale or exchange of a capital asset, like a derivative contract, and are taxed at different rates based on the holding period (short-term or long-term). Ordinary income is income from sources like wages, interest, or short-term capital gains (held for one year or less).

Long-term capital gains (held over one year) are taxed at lower preferential rates than ordinary income, which is a key difference for profitable traders.