Section 1256 Contract

DEFINITION of 'Section 1256 Contract'

A type of investment defined by the Internal Revenue Code (IRC) as a regulated futures contract, foreign currency contract, non-equity option, dealer equity option or dealer securities futures contract. Each contract held by a taxpayer at the end of the tax year is treated as if it was sold for its fair market value, and gains or losses are treated as either short-term or long-term capital gains. The Internal Revenue Service (IRS) is responsible for implementing the IRC.

BREAKING DOWN 'Section 1256 Contract'

Investors reports gains and losses for Section 1256 Contract investments by using Form 6781. Hedging transactions are treated differently.


More specific information can be found in Subtitle A (Income Taxes), Chapter 1 (Normal Taxes and Surtaxes), Subchapter P (Capital Gains and Losses), Part IV (Special Rules for Determining Capital Gains and Losses) of the Internal Revenue Code.

RELATED TERMS
  1. Form 6781: Gains And Losses From ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
  2. Contract Unit

    The actual amount of the underlying asset represented by a single ...
  3. Internal Revenue Code - IRC

    The comprehensive set of tax laws created by the Internat Revenue ...
  4. Contract Size

    The deliverable quantity of commodities or financial instruments ...
  5. Inverted Market

    In the context of options and futures, this is when the current ...
  6. Section 988

    A financial transaction involving a capital loss or gain on an ...
Related Articles
  1. Professionals

    End Users and Dealers

    CFA Level 1 - End Users and Dealers. Learn how end users and dealers interact in the forwards market. Provides examples showcasing the role of both in a financial transaction.
  2. Options & Futures

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  3. Options & Futures

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
  4. Term

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  5. Professionals

    Tax Rules, LEAPS and Futures

    Tax Rules, LEAPS and Futures
  6. Markets

    Intermediate Guide To E-Mini Futures Contracts - Tax Advantages

    Futures contracts are taxed at different rates than stocks, bonds, ETFs and mutual funds. In some cases, trading e-mini stock index futures may result in more favorable tax treatment than other ...
  7. Options & Futures

    20 Investments: Futures Contract

    What Is It? As the name implies, futures are contracts on commodities, currencies, and stock market indexes that attempt to predict the value of these securities at some date in the future. ...
  8. Forex Education

    Forex Taxation Basics

    Trading forex can make for a confusing time organizing your taxes. These simple steps will keep everything straight.
  9. Trading Strategies

    Market Strength: S&P 500 Futures

    If you've ever watched financial television before or after the markets open you will probably notice that they often quote the latest index futures price on the "bug" in the bottom corner. ...
  10. Your Clients

    Here's the Best Way to Skirt Capital Gains Taxes

    Taxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
RELATED FAQS
  1. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
  2. What is the difference between forward and futures contracts?

    Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell ... Read Answer >>
  3. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
  4. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  5. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  6. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center