What are Section 1256 Contracts and how are the gain and losses treated for tax purposes?
Per the IRS, "Section 1256 contracts include regulated futures contracts, nonequity options (including stock index options) and dealer equity options. The tax issues related to these contracts are different than typical capital gain assets."
The gain or loss on these contracts is generally treated as 60% long-term and 40% short-term, regardless of the holding period. Thus, the maximum effective federal tax rate on Section 1256 gains is currently 23%.
Furthermore, any unrealized gain or loss on the contracts at year end is taxable in the current year as if sold, with an adjustment to the taxpayer's tax basis for the gain or loss already treated as realized at the end of the previous year.