1. Beginner's Guide To E-Mini Futures Contracts: Introduction
  2. Beginner's Guide To E-Mini Futures Contracts: What Are The E-Minis?
  3. Beginner's Guide To E-Mini Futures Contracts: E-Mini Characteristics
  4. Beginner's Guide To E-Mini Futures Contracts: E-Mini Specifications
  5. Beginner's Guide to E-mini Futures Contracts: Popular E-mini Contracts
  6. Beginner's Guide To E-Mini Futures Contracts: Who Trades The E-Minis?
  7. Beginner's Guide To E-Mini Futures Contracts: Trading The E-Minis
  8. Beginner's Guide To E-Mini Futures Contracts: Other E-Mini Contracts
  9. Beginner's Guide To E-Mini Futures Contracts: Volume and Volatility
  10. Beginner's Guide To E-Mini Futures Contracts: Margins
  11. Beginner's Guide to E-Mini Futures Contracts: Rollover Dates and Expiration
  12. Beginner's Guide To E-Mini Futures Contracts: Brokers
  13. Beginner's 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 trading instruments. Like other futures contracts, the e-mini stock index futures contracts (including ES, NQ, YM and RTY) generally fall under Section 1256 of the U.S. tax code, and gains and losses are marked-to-market at the end of each tax year.

Marked-to-market means that all realized and unrealized gains and losses are reported. As futures contracts, e-minis fall under the 60/40 rule, where 60% of gains are treated as long-term capital gains and 40% are treated as short-term capital gains (ordinary income) – regardless of the actual length of the holding period. For active traders, this can result in tax savings. (For more, see What are Unrealized Gains and Losses?)

The 60/40 Rule

Currently, the maximum long-term capital gains tax rate is 20% and the maximum short-term capital gains tax rate is 39.6%. Under the 60/40 rule, futures traders can achieve a net maximum blended tax rate of 27.84%. Depending on your tax bracket, this figure may be lower. For example, assume you make $50,000 one year trading the ES. $30,000 will be taxed at the lower, long-term capital gains rate, and $20,000 will be taxed at the higher, short-term capital gains rate.

When trading stocks, by comparison, 100% of gains are taxed at the short-term gains tax rate if the positions are held for less than one year. The favorable tax treatment for futures traders is one reason why active traders enter the futures market rather than the stock market. (For more, see Capital Gains Tax 101.)

Year-End Filing

Another advantage with trading futures is the ease of year-end filing. At the end of each year, futures brokers send each client a 1099-B form. This tax form shows the net result of all trading – not each individual trade. This is the number you enter on your tax return (compared with stock trades where you have to enter each individual trade). Even though most futures trading is exempt from detailed transaction reporting, it’s still a good idea to keep well-maintained and accurate records of all trading activity in case of an audit. (For related reading, see Tax Tips for the Individual Investor.)

Taxes are complicated and rules change frequently. It’s important to consult with a qualified tax specialist or accountant for up-to-date information and advice to ensure you receive the most favorable tax treatment possible.

Conclusion

The e-minis are the small but mighty cousins of their larger, full-sized contracts. Popular among individual and institutional traders alike, the e-minis offer many perks, such as substantial volume and volatility, which help set the stage for profitable trading opportunities. They are also relatively inexpensive to trade. Most brokers offer low commissions, and you’ll have access to leverage – which means you can trade large positions with less money. Of course, while leverage can magnify your wins, it also magnifies your losses.

E-mini traders also have nearly 24/6 access to the e-mini markets, which is ideal for traders who may not be available during regular U.S. market hours. And since the e-minis are futures contracts, they are subject to better tax treatment when compared with stocks.

The most popular e-minis are the e-mini stock index futures contracts, which include the e-mini S&P 500 (ES), E-mini NASDAQ-100 (NQ), E-mini Dow (YM) and the E-mini Russell 2000 (RTY). Other e-mini products offer access to other stock indexes as well as metals, currencies and commodities.


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