The 60/40 Tax Rule for Futures Traders

The 60/40 rule is the single largest tax advantage available to active US futures traders, and it is also the least understood. It says that gains and losses on Section 1256 contracts are treated as 60% long-term and 40% short-term, no matter how long you actually held the position. A scalper who is flat by lunchtime every day still gets 60% of the year long-term treatment. Nothing else in retail trading works like this.

What the split actually does

Ordinarily, US capital gains treatment depends on how long you held the asset. Hold longer than a year and you get long-term rates, which are lower. Sell sooner and the gain is short-term, taxed at your ordinary income rate, which for an active trader is usually the highest rate they pay on anything.

Section 1256 removes holding period from the question entirely. The statute simply declares the split. Sixty percent long-term, forty percent short-term, applied to your net Section 1256 result for the year. A position held for one minute and a position held for one year are treated identically.

A worked example

Take a trader who nets 50,000 dollars of gains for the year, all from day trading index futures, never holding overnight. Compare how that result is characterised under each treatment. The dollar amounts of tax are not shown here because rates change and depend on your bracket; what matters is the split itself.

The saving comes from moving 30,000 dollars of that gain from the ordinary income rate to the long-term capital gains rate. How much that is worth in dollars depends on your bracket and the current rates, which is exactly the calculation a futures tax calculator is for. The structural point is that the trader did nothing differently to earn it. They chose an instrument.

The rule applies to losses too

Sixty percent of a loss is also treated as long-term, and this is where the rule stops being a gift. Long-term losses first offset long-term gains, and short-term losses first offset short-term gains. A trader with a bad year in futures ends up with a loss that is mostly long-term, which is less useful if the rest of their income is ordinary.

The net capital loss you can deduct against ordinary income in a year is capped at a fixed dollar amount, with the excess carried forward. For a trader who lost heavily, that cap can mean the loss takes many years to actually use. Section 1256 offers a specific escape from this that most traders never hear about, covered on the Form 6781 page: a net Section 1256 loss can be carried back three years against prior Section 1256 gains rather than only carried forward.

Who benefits most

The advantage scales with how short your holding period would otherwise be, and with how high your ordinary income rate is.

• Day traders and scalpers benefit most, because without Section 1256 every single trade would be short-term.
• Swing traders holding for weeks benefit nearly as much, for the same reason.
• Position traders who genuinely hold over a year benefit least, and can in principle be slightly worse off, because they would have had 100% long-term treatment rather than 60%.
• Traders in higher ordinary income brackets benefit more in absolute dollars, because the gap between the two rates is wider.

What it does not do

The 60/40 rule is a characterisation rule, not an exemption. It does not reduce the amount of gain, it does not defer anything, and it does not remove the year-end mark to market on open Section 1256 positions. It also does not turn trading into a business for tax purposes, which is a separate question handled by trader tax status.

It also does not apply to everything a futures trader might touch. Stock trades, options on equity ETFs and spot cryptocurrency sit outside it. If your account mixes Section 1256 contracts with ordinary securities, the two are reported separately and only the qualifying part gets the split.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to CME Group, CFTC (US Commodity Futures Trading Commission), IRS and SEC Investor.gov. Always confirm current rules, rates and contract specifications on the official source before you trade.