Form 6781: Section 1256: Contracts and Straddles Gains and Losses
Form 6781 reports gains and losses from Section 1256 contracts and straddles. Straddling entails owning contracts that counter each other’s loss risk. A straddle occurs when a trader buys a call and a put option for the same investment security.
Most options and futures traders must utilize this form for annual tax filing. The stated gain or loss for investments is 40% short-term and 60% long-term.
Who can file Form 6781, Section 1256? Who can file?
Individual tax filers must declare contract profits and losses mark-to-market.
Form 6781 features distinct sections for straddles and Section 1256 contracts, requiring investors to specify the investment type.
Contracts under Section 1256 include regulated futures, foreign currency options, dealer equity options, and dealer securities futures. Even unclosed investments are considered sold at year-end for tax purposes. Their fair market value determines gains and losses.
Say a trader paid $25,000 for a regulated futures contract on May 5, 2019. The contract remains in their portfolio at $29,000 at tax year’s end. The trader’s mark-to-market profit is $4,000. Traders report this on Form 6781 as 60% long-term and 40% short-term capital gains. On January 30, 2020, the trader sold their long position for $28,000. After recognizing a $4,000 gain in 2019, the trader will record a $1,000 loss (calculated as $28,000 minus $29,000) on their 2020 tax return, with 60% long-term and 40% short-term capital losses.
Investors record straddle and Section 1256 contract gains and losses on Form 6781, but hedging transactions differ. Due to the annual sale of Section 1256 contracts, gains and losses are deemed 60% long-term and 40% short-term, regardless of the asset’s holding tenure. Section 1256 agreements allow investors or traders to take 60% of profits at the preferential long-term tax rate, even if held for less than a year.
Even if foreign securities contracts traded in foreign exchanges are not Section 1256, investors must report gains or losses on Form 6781.
Section 1256: Contracts and Straddles Gains and Losses Filing
For Section 1256 investment profits and losses, Part I of Form 6781 requires reporting at the actual sale price or the December 31 mark-to-market price. Part II of the form asks traders to disclose straddle losses in Section A and gains in Section B. Part III covers unrecognized payments on positions retained after the tax year, but only if a loss is recognized.
Download Form 6781.
The IRS offers Form 6781: Gains and Losses from Section 1256 Contracts and Straddles for download.
Conclusion
- Form 6781: Section 1256 Gains and Losses Investors utilize the IRS Contracts and Straddles tax form to record straddle or financial contract income and losses.
- Straddles and Section 1256 contracts have distinct Form 6781 sections.
- Section 1256 contracts include regulated futures, foreign currency options, dealer equity options, and dealer securities futures.
