7587 / How are securities futures contracts taxed?

Generally, gain or loss on securities futures contracts (see Q 7586) will be taxed under the rules relating to the disposition of the underlying property.¹ IRC Section 1234B provides that gain or loss from the sale, exchange, or termination of a securities futures contract (other than a dealer securities futures contract) will be treated as gain or loss from the sale, exchange, or termination of property of the same character as the property to which the contract relates has (or would have) in the hands of the taxpayer.² Thus, if the underlying security would be a capital asset in the taxpayer’s hands, then gain or loss from the sale or exchange of the securities futures contract would be capital gain or loss.³

Holding period. If property is delivered in satisfaction of a securities futures contract to acquire property, the holding period for the property will include the period the taxpayer held the contract, provided that the contract was a capital asset in the hands of the taxpayer.⁴

Short sale treatment. In applying the short sale rules (see Q 7524 to Q 7535), a securities futures contract to acquire property will be treated in a manner similar to the property itself.⁵ Thus, for example, the holding of a securities futures contract to acquire property and the short sale of property which is substantially identical to the property under the contract will result in the application of the rules under IRC Section 1233(b) (regarding short-term gains and holding periods). (Because securities futures contracts are not treated as commodity futures contracts under IRC Section 1234B(d), the rule providing that commodity futures are not substantially identical if they call for delivery in different months does not apply.) In addition, a securities futures contract to sell property is treated as a short sale, and the settlement of the contract is treated as the closing of the short sale.⁶

Except as otherwise provided in the straddle regulations under IRC Section 1092(b) – which treats certain losses from a straddle as long-term capital losses (see Q 7599) – or in IRC Section 1233 (gains and losses from short sales, special holding period rules), capital gain or loss from the sale, exchange, or termination of a securities futures contract to sell property (i.e., the short side of a futures contract) will be short-term capital gain or loss.⁷