What Is Form 6781: Gains and Losses From Section 1256 Contracts and Straddles?

Form 6781: Gains and Losses From Section 1256 Contracts and Straddles is used to report gains and losses from straddles or financial contracts that are labeled as Section 1256 contracts.

A straddle is a strategy that involves holding contracts that offset the risk of loss from each other. For example, if a trader buys both a call option and a put option for the same investment security at the same time, they have formed a straddle. 

Most options and futures traders will need to use this form when they complete their taxes each year. For reported investments, 40% of the gain or loss is reported as short-term, and the remaining 60% is reported as long-term.

Key Takeaways

  • Form 6781: Gains and Losses From Section 1256 Contracts and Straddles is a tax form distributed by the Internal Revenue Service (IRS) that is used by investors to report gains and losses from straddles or financial contracts.
  • Form 6781 has separate sections for straddles and Section 1256 contracts.
  • Section 1256 contracts include regulated futures contracts, foreign currency contracts, options, dealer equity options, or dealer securities futures contracts.

Who Can File Form 6781: Gains and Losses From Section 1256 Contracts and Straddles?

Individual tax filers must report gains and losses for contracts according to mark-to-market rules.

Form 6781 has separate sections for straddles and Section 1256 contracts, so investors have to identify the specific type of investment used.

Section 1256 contracts include regulated futures contracts, foreign currency contracts, options, dealer equity options, or dealer securities futures contracts. These investments are considered to be sold at year-end (even if the positions are not actually closed) for tax purposes. They are assigned their fair market value in order to determine gains and losses.

For example, assume a trader bought a regulated futures contract on May 5, 2019, for $25,000. At the end of the tax year, they still have the contract in their portfolio valued at $29,000. This trader's mark-to-market profit is $4,000. The trader reports this on Form 6781 (treated as 60% long-term and 40% short-term capital gain). On January 30, 2020, the trader sells their long position for $28,000. Since they've already recognized a $4,000 gain on their 2019 tax return, the trader will record a $1,000 loss (calculated as $28,000 minus $29,000) on their 2020 tax return (treated as 60% long-term and 40% short-term capital loss).

Investors report gains and losses for straddles and Section 1256 contract investments by using Form 6781, but hedging transactions are treated differently. Since Section 1256 contracts are considered to be sold every year, the holding period of the underlying asset does not determine whether or not the gain or loss is short-term or long-term: all gains and losses on these contracts are considered to be 60% long-term and 40% short-term. In other words, Section 1256 contracts allow an investor or trader to take 60% of the profit at the more favorable long-term tax rate even if the contract was only held for a year or less.

Form 6781: Gains and Losses From Section 1256 Contracts and Straddles require that investors trading foreign securities contracts in foreign exchanges report gains or losses from that contract on Form 6781, even if those contracts would generally not be treated as a Section 1256 contract.

How to File Gains and Losses From Section 1256 Contracts and Straddles

Part I of Form 6781 requires Section 1256 investment gains and losses be reported at either the actual price the investments were sold for, or the mark-to-market price established on December 31. Part II of the form requires the losses on the trader’s straddles be reported in Section A and gains reported in Section B. Part III is provided for any unrecognized gains on positions held at the end of the tax year, but only has to be completed if a loss is recognized on a position.

Download Form 6781 Here

The IRS provides access to a downloadable Form 6781: Gains and Losses From Section 1256 Contracts and Straddles.