What Is the Significance of Section 1256 Contracts in Derivatives Tax?

Section 1256 contracts are regulated futures, foreign currency contracts, and certain options traded on a qualified board or exchange. Their main significance is the mandatory "mark-to-market" rule, where contracts are treated as if sold at year-end.

Additionally, gains and losses are taxed at a favorable 60% long-term and 40% short-term capital gains rate, regardless of the actual holding period. This 60/40 rule often results in a lower effective tax rate for profitable traders.