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

Section 1256 contracts are afforded special tax treatment, primarily the 60/40 rule. This rule dictates that 60% of the gain or loss is taxed as long-term capital gain or loss, and 40% is taxed as short-term, regardless of the actual holding period.

This often results in a lower overall tax rate for profitable traders. These contracts are also subject to the mark-to-market rule at year-end.