Do you pay taxes on futures trading?

What are futures and why their tax rules differ

Definition: what counts as a futures contract, beginner futures trading

For readers starting out with derivative markets, a futures contract is a standardized agreement to buy or sell an asset at a future date, traded on an exchange and settled according to its contract terms. Exchange-traded futures cover a wide range of underlying items, including commodities, interest-rate products, and broad market or sector indexes, and are typically cleared through central counterparties designed to reduce counterparty risk.

Not all derivative arrangements are taxed the same way. The U.S. tax code treats a group of regulated exchange-traded contracts as Section 1256 contracts, which are subject to year-end mark-to-market accounting and a specific capital-gain character mix. For an official description of which contracts fall into that category, consult the IRS guidance on Form 6781 for how these contracts are identified for tax purposes About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

Common exchange-traded futures that often qualify as Section 1256 contracts include many broad-based index futures and regulated commodity futures, though contract classification can vary by exchange and by the contract’s specifics. If you are working through your own statements, look for contract identifiers and exchange classifications on trade confirmations and monthly reports to confirm status with the exchange documentation.

Because Section 1256 rulemaking is set out in IRS materials and reinforced by exchange practices, traders who want to know whether a specific product is treated as a Section 1256 contract should cross-check exchange contract specs with the IRS Form 6781 instructions and their broker or clearing statements.

How Section 1256 and the 60/40 rule work

Mark-to-market at year-end: what that means

Under Section 1256, qualifying contracts are treated as if they were sold for their fair market value on the last business day of the tax year. That year-end mark-to-market converts unrealized gains or losses into taxable amounts for the year, even when positions remain open into the next year. The practical effect is that your exchange P and L for the tax year should reflect the year-end valuation you report on your return.

This year-end treatment is explained in IRS materials for Form 6781 and is an essential filing step for anyone holding Section 1256 contracts, because it changes timing compared with ordinary securities rules. For the core IRS explanation, review the Form 6781 instructions which describe mark-to-market reporting for these contracts Instructions for Form 6781.

How the 60/40 long-term/short-term split is applied

Gains and losses from Section 1256 contracts are given a blended character: 60 percent is treated as long-term capital gain or loss and 40 percent as short-term, regardless of how long you actually held the position. That means a position held for minutes or months is still split under the 60/40 rule for federal tax character purposes.

The 60/40 mix applies to net gains or losses after mark-to-market adjustments and is a stable rule described in tax practice summaries and IRS guidance on Section 1256 contracts, which explain how to allocate and report the two components when completing Form 6781 How Futures Contracts Are Taxed (Section 1256 overview and 60/40 rule).

How to report futures on your tax return: Form 6781 and practical filing steps

Identifying Section 1256 trades on exchange statements

Start by pulling your year-end exchange statements and broker reports. Look for contract symbols, trade dates, and clear labeling that indicates which trades are exchange-traded futures or broad-based index options typically classified as Section 1256 contracts. Exchanges sometimes provide contract-level documentation that clarifies whether a contract is a Section 1256 product, and exchange P and L reports commonly aggregate year-to-date realized and unrealized amounts.

Once you have identified the trades that likely fall under Section 1256, map those totals into a working spreadsheet to compute the mark-to-market amount for the year and to reconcile the numbers to your exchange P and L. The IRS description of Form 6781 and its instructions show the lines where net Section 1256 gains or losses are reported and how carryback or carryforward rules can apply if you have a net loss About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

Step-by-step: completing Form 6781 and carryback/carryforward basics

Form 6781 is where you report gains and losses from Section 1256 contracts and straddles. The form separates net section 1256 gains and losses and provides a place to indicate any carryback of net losses to prior years or carryforward where the loss cannot be used entirely in the current year. Follow the Form 6781 instructions carefully to move totals to Schedule D or the applicable forms for your return type.

When you have a net Section 1256 loss, the IRS instructions explain how to carry back the loss to prior years where applicable, and how to carry forward any remaining disallowed amount. Because carryback and carryforward handling can affect other returns, keep clear working papers showing how you calculated the year-end mark-to-market totals Instructions for Form 6781.

Records to keep for substantiation

Retain exchange P and L reports, trade confirmations, monthly account statements, and any contract specifications you used to value open positions at year-end. These records support the numbers you report on Form 6781 and help you respond if a tax authority requests explanation for a year-end valuation or a large net gain or loss.

How futures taxation differs from stocks and crypto

Holding-period rules for stocks and why they differ

Ordinary stock trades are taxed using a holding-period rule that determines whether gains are short-term or long-term; short-term gains are taxed at ordinary-income rates while long-term gains typically receive preferential capital-gains rates. The length of time you hold a stock therefore directly affects the tax character of any gain or loss.

By contrast, Section 1256’s 60/40 rule means the holding period generally does not change the tax character for qualifying futures contracts, because the law prescribes the long-term and short-term split instead of relying on how long you held the position. For a simple comparison of capital gains concepts, see the IRS Topic on capital gains and losses Topic No. 409 Capital Gains and Losses.

IRS virtual currency guidance: crypto treated as property

The IRS treats virtual currencies as property for federal tax purposes, and most retail crypto transactions are taxed under capital gains rules that rely on holding period and property rules. That framework differs from the Section 1256 treatment of many regulated futures contracts and is important to keep in mind if you trade both products.

Because some crypto derivatives or exchange-traded products can be structured in ways that resemble futures, be careful not to assume futures tax treatment applies automatically to a crypto derivative; classification often depends on contract terms and how an exchange or regulator treats the product Virtual Currencies, IRS guidance.

What that means for retail traders comparing products

If you trade a mix of stocks, crypto, and exchange-traded futures, expect different tax timing and character rules across those product types. Comparing after-tax results requires understanding the relevant tax rules for each product and how your holding periods and election choices interact with those rules.

When in doubt about a product’s classification, check the exchange’s contract documentation and IRS guidance, and maintain clear records that separate trades by product type so you can apply the correct tax treatment when preparing your return.

Special situations that can change timing or character of gains

Straddles and Section 1092 interactions

Certain trading patterns, such as offsetting positions that create a straddle, may trigger special rules under Section 1092 that can change the timing of gain recognition or shift how gains and losses are characterized for tax purposes. These rules are designed to prevent taxpayers from using offsetting positions to manipulate the timing of taxable events.

When straddle rules apply, you may need to make adjustments to the year-end mark-to-market calculations or to the way certain losses are recognized. Because straddle and related-party rules can be technical and fact-dependent, review the relevant IRS guidance and consider specialist tax help if you believe straddle rules might apply to your trading activity Instructions for Form 6781.

Trader or dealer status and Section 475 elections

Trader or dealer status and making a Section 475 mark-to-market election for securities traders are examples of situations that can change the timing or character of gains. A Section 475 election applies to securities and certain commodities dealers and can move a trader’s reporting to a mark-to-market basis under different rules than Section 1256, which may affect which gains are ordinary versus capital.

If you think you qualify as a trader or dealer, or if you are considering a Section 475 election, document your facts and consult a tax professional because these designations involve tests and choices that can affect multiple tax years and interact with other tax areas How Futures Contracts Are Taxed (Section 1256 overview and 60/40 rule).

Mixed portfolios, different contract types, and crypto derivatives complexity

Mixed portfolios that include Section 1256 contracts, securities, and crypto derivatives can require transaction-level review to classify each instrument correctly. Newer delivery-settled or cash-settled crypto derivatives may not have settled federal guidance in all cases, so assumptions about treatment can carry risk.

When you trade newer or hybrid products, keep extra documentation about contract settlement terms and ask the exchange or the counterparty for contract specs that show how the product is structured. That information will be important if you need to justify classification or to explain an unusual year-end valuation to a tax authority.

Practical example framework and what paperwork to prepare

How to build a calculation workflow using your exchange reports

Set up a repeatable workflow starting with monthly and year-to-date exchange P and L reports. Use those reports to populate a spreadsheet that lists each contract, the quantity held, the year-end market value for open positions, realized trades in the year, and the resulting unrealized gain or loss for positions you still hold at year-end.

From that working spreadsheet, sum realized and unrealized gains for contracts that qualify as Section 1256 and apply the 60/40 split to the combined net amount. Keep separate tabs for contract-level details, for monthly reconciliations, and for the Form 6781 summary lines so you can trace every number back to an exchange report or trade confirmation Tax Guide and Reporting for Futures and Options Trading.

What to include in a records folder for tax season

Create a records folder that includes year-end P and L, monthly statements, trade confirmations for significant trades, and any exchange contract specifications used to determine fair market value at year-end. Also keep your working spreadsheet versions and notes on valuation methods you used if you adjusted an exchange-reported number for a valid reason.

Storing these materials in a single, dated archive makes it easier to respond to questions and supports the carryback or carryforward work you might need if you report a net loss on Form 6781 and must apply IRS instructions for loss treatment About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.

When to get help from a tax pro

Consider getting professional help if you have large net Section 1256 gains or losses, if you believe straddle rules apply, if you are exploring a Section 475 election, or if your portfolio mixes many contract types including novel crypto derivatives. These situations can affect multiple tax years and may require specialized tax knowledge.

A tax professional can review your trade tapes, exchange documentation, and your working spreadsheet to confirm classification, to check for straddle exposures, and to recommend how to handle carrybacks or carryforwards when a net loss appears on Form 6781.

Common mistakes, audit triggers, and how to avoid them

Top filing errors traders make

Common filing errors include misclassifying contracts, failing to apply year-end mark-to-market for qualifying Section 1256 contracts, and omitting Form 6781 when it is required. These mistakes can lead to incorrect tax positions and may trigger requests for clarification from tax authorities.

To reduce errors, reconcile exchange totals to the numbers you report on Form 6781 and keep a one-page checklist that confirms you have identified all Section 1256 contracts, applied the year-end mark-to-market, and separated the 60 percent and 40 percent components correctly Instructions for Form 6781.

Recordkeeping gaps and how auditors look at futures activity

Audits or information requests often focus on missing backing documentation for year-end valuations, unexplained reconciliations between broker statements and return line items, or inconsistent classification across tax years. Strong recordkeeping helps show that you applied the correct valuation method and followed the IRS instructions in preparing Form 6781.

Keeping clear exports of exchange P and L, monthly statements, and dated working files reduces friction if a tax authority asks for substantiation, and it helps show a consistent approach to valuing open positions at year-end Tax Guide and Reporting for Futures and Options Trading.

Simple checks to reduce mistakes before filing

Before you file, run basic checks: verify that every contract you listed as a Section 1256 item appears on an exchange or clearing report as exchange-traded, confirm your year-end values reconcile to exchange summaries, and ensure Form 6781 totals flow correctly to your Schedule D or other return locations.

These simple reconciliations catch most common mistakes and give you clearer documentation if you need to explain an unusual result to your preparer or to a tax officer.

State taxes, unsettled questions, and next steps

Why state tax treatment can vary and where to check

State tax treatment of futures and derivatives varies by jurisdiction. Some states follow federal definitions closely, while others have specific rules or differing treatment for capital gain characterization. Check your state’s revenue department guidance for details on how they treat Section 1256 contracts or consult a state tax resource.

Because state rules can diverge from federal rules, plan to confirm whether a state requires its own treatment of mark-to-market items or follows the federal characterization when preparing your state return.

Open issues: crypto derivatives and delivery-settled vs cash-settled products

Newer crypto derivatives, especially those with delivery-settled features or with hybrid settlement terms, may not have fully settled federal guidance in every case. Classification often depends on contract mechanics, exchange practices, and whether the product is treated as property, a security, or a regulated futures contract.

If you trade such products, save contract specs and ask the exchange for any classification guidance so you can justify your treatment if questions arise during tax review.

A short checklist: next steps after reading

After finishing this guide, do the following: classify contracts on your statements, pull year-to-date and year-end P and L reports, build a working spreadsheet that maps contract totals to Form 6781, and flag any complex situations for professional review. These steps help you move from uncertainty to a concrete draft of your return entries.

If you are unsure about classification or have a portfolio with straddles, dealer status questions, or Section 475 considerations, consult a tax professional to avoid costly mistakes and to align reporting with IRS rules.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.