Futures Trading Taxes: How Section 1256 & the 60/40 Rule Work

This guide is general educational information, not tax, legal, or financial advice. Tax rules are complex, change over time, and depend heavily on your individual circumstances, your residency, and how your trading is structured. Nothing here should be relied on for filing.

Rules vary significantly by country — the framework below is US-specific and does not apply to traders elsewhere. Before making any decision, consult a qualified tax professional or CPA familiar with trader taxation. We are an affiliate review site, not a tax advisor, and we cannot tell you what you owe.

Under US tax law, certain instruments are classified as Section 1256 contracts, which generally includes regulated futures contracts traded on US exchanges, along with broad-based index options and some other products. The popular index futures most retail traders use — such as the ES and NQ and their micro versions — typically fall into this category, but you should confirm the status of any specific instrument.

The classification matters because Section 1256 contracts get a distinct tax treatment that differs from how stocks and most ETFs are taxed. That treatment is the 60/40 rule combined with mark-to-market, covered next. Not every product a futures trader touches is a 1256 contract, so the way a position is taxed can depend on exactly what you traded.

The signature feature of Section 1256 is the 60/40 rule: regardless of how long you held the position — even if you opened and closed it in seconds — 60% of your net gain is treated as long-term capital gain and 40% as short-term. Long-term rates are generally lower than short-term (ordinary) rates, so this blend can produce a lower effective tax rate than the same profit earned trading stocks intraday.

This is a meaningful contrast with equities, where a stock held for under a year is taxed entirely at higher short-term rates. For an active futures day trader, the automatic 60/40 split can be a genuine advantage. The exact rates depend on your overall income and bracket, and the benefit only applies to instruments that actually qualify as 1256 contracts — verify with a professional.

Section 1256 contracts are subject to mark-to-market accounting: at the end of the tax year, any open positions are treated as if they were sold at fair market value on the last business day. The resulting paper gain or loss is included in that year’s taxes, and your cost basis resets for the next year.

Practically, this means you can owe tax on unrealized gains in open 1256 positions, and you cannot defer a winning position into the next year simply by leaving it open. Brokers typically report your aggregate 1256 results on Form 1099-B, and these gains and losses are generally reported on Form 6781 before flowing to Schedule D. A tax professional can confirm the correct forms for your situation.

Prop-firm income is typically taxed very differently from your own futures trading. When you trade a funded prop account, you are usually not trading your own capital in a brokerage account in your name — you are receiving a profit share / payout from the firm. As a result, many firms report these payouts as independent-contractor or miscellaneous income on a Form 1099 (often 1099-NEC or 1099-MISC), not as Section 1256 capital gains.

That distinction has real consequences: 1099 income is generally treated as ordinary income and may be subject to self-employment considerations, and it does not automatically receive the 60/40 treatment that your personal 1256 trading would. How exactly a given firm reports payouts can vary, and the right way to handle it on your return depends on your circumstances — this is precisely the kind of question to take to a CPA who understands prop trading.

To summarize the contrast: futures (1256 contracts) get the automatic 60/40 split and mark-to-market treatment, with results typically reported via 1099-B and Form 6781. Stocks and most ETFs are taxed on realized gains only, with the full short-term rate applying to anything held under a year and the wash-sale rule limiting loss harvesting.

Notably, the wash-sale rule that complicates active stock trading generally does not apply to Section 1256 contracts, which can simplify accounting for futures traders. Combined with the 60/40 rate blend, this is why many active traders consider the futures tax regime favorable — but the advantages only apply to qualifying contracts, only in the US, and only as the current rules stand. Keep clean records, save your 1099s and broker statements, and have a professional prepare or review your return.