Why Is the 60/40 Split Considered a Tax Advantage for Short-Term Traders?
The 60/40 split is advantageous for short-term traders because 60% of their net gains are taxed at the lower long-term capital gains rate, even if the contracts were held for less than a year. Short-term gains from non-Section 1256 assets are taxed at the higher ordinary income tax rates.
This rule effectively lowers the overall effective tax rate on short-term profits from Section 1256 contracts.
Glossar
Effective Tax Rate
Taxation ⎊ The effective tax rate within cryptocurrency, options, and derivatives signifies the actual percentage of profits subject to taxation, diverging from nominal rates due to factors like tax-advantaged accounts, deductions, and specific derivative contract structures.
Constructive Sale Rule
Framework ⎊ The Constructive Sale Rule, a principle rooted in common law and adapted for modern financial instruments, imputes a sale of an asset when a party exercises control over it, even without a formal transfer of ownership.
60/40 Split
Allocation ⎊ The 60/40 Split dictates that sixty percent of the net gain or loss from a Section 1256 Contract is treated as a long-term capital gain or loss.
Long-Term Capital Gains
Benefit ⎊ Long-term capital gains represent the profit realized from the sale of a capital asset, including certain cryptocurrencies and financial derivatives, held for a period exceeding one year.
Substantially Offsetting Position
Position ⎊ A substantially offsetting position, within cryptocurrency derivatives and options trading, denotes a portfolio configuration designed to neutralize or significantly diminish the directional risk exposure of an existing holding.
Tax Advantage
Mitigation ⎊ Tax advantages within cryptocurrency, options, and derivatives contexts frequently arise from jurisdictional arbitrage and the characterization of digital assets, influencing net operating loss utilization.