7592 / How are regulated futures contracts and other Section 1256 contracts taxed?

Regulated futures contracts are generally taxed under a mark-to-market tax rule that closely corresponds to the daily cash settlement system used for futures contracts on domestic exchanges (see Q 7591). Regulated futures contracts are one of the types of “IRC Section 1256 contracts” that are subject to those rules. Other types of instruments that are taxed in the same manner are foreign currency contracts and nonequity options (see Q 7582).¹ The term “IRC Section 1256 contract” generally does not include any “securities futures contract” or option on such a contract (an exception exists for dealer securities futures contracts), and, as a result of changes made in the Wall Street Reform and Consumer Protection Act of 2010, it also does not include any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.² For the definition of securities futures contract, see Q 7586.

Regulated futures contracts and IRC Section 1256 contracts, like other positions that are subject to the mark-to-market requirements, are excluded from the definition of an appreciated financial position under IRC Section 1259(b)(2)(B) (see Q 7617). However, depending on the taxpayer’s other holdings, it appears that a constructive sale could result from the taxpayer’s entering into a regulated futures contract (or another IRC Section 1256 contract) to deliver property that is the same as or substantially identical to an appreciated financial position held by the taxpayer³ (see Q 7617 to Q 7621).

The owner of a regulated futures contract that is part of a tax straddle or a conversion transaction may be subject to different tax rules (see Q 7593 to Q 7616).⁴

Gains and losses on IRC Section 1256 contracts held for investment are capital gains and losses regardless of the nature of the underlying property.⁵