Quick answer
What is a Section 1256 contract?
A Section 1256 contract is a regulated futures contract, foreign currency contract, nonequity option, dealer equity option or dealer securities futures contract under 26 U.S.C. §1256. Gains and losses are treated as 60% long-term and 40% short-term regardless of holding period, and open positions are marked to market at year end, as if sold on December 31.
Key takeaways
- 01Taxed 60% long-term, 40% short-term, whatever the holding period.
- 02Top blended federal rate: 30.6% vs 40.8% short-term.
- 03Open positions are marked to market at year end.
- 04SPX options qualify; SPY options do not.
| Statute | 26 U.S.C. §1256 |
|---|---|
| Split | 60% long-term / 40% short-term |
| Year end | Marked to market |
| Reported on | Form 6781 |
| Loss carryback | Up to 3 years (election, §1212(c)) |
| Not included | Options on single stocks and ETFs |
The Short Answer
What is a Section 1256 contract?
A Section 1256 contract is a regulated futures contract, foreign currency contract, nonequity option, dealer equity option or dealer securities futures contract under 26 U.S.C. §1256. Gains and losses are treated as 60% long-term and 40% short-term regardless of holding period, and open positions are marked to market at year end, as if sold on December 31.
For most investors the key category is nonequity options: listed options on broad-based indexes such as SPX, XSP, NDX and RUT, plus options on futures. At the top bracket the blended federal rate is 30.6% (including 3.8% NIIT), versus 40.8% on short-term gains. Options on stocks and ETFs, including SPY and QQQ, are not Section 1256 contracts.
What Qualifies
Which contracts are Section 1256 contracts?
| Contract | Section 1256? | Why |
|---|---|---|
| Regulated futures (e.g. ES, NQ, CL) | Yes | §1256(b)(1)(A) |
| Options on futures | Yes | Nonequity options |
| SPX, XSP, NDX, RUT index options | Yes | Listed options on broad-based indexes are nonequity options |
| VIX options | Yes | Nonequity option |
| Options on SPY, QQQ, IWM (ETFs) | No | Options on a stock or fund share are equity options |
| Options on single stocks | No | Equity options |
| Narrow-based index options | No | Treated as equity options |
| Interest-rate and equity swaps | No | Excluded by §1256(b)(2)(B) |
The 60/40 Rate
How much does the 60/40 rule save?
Chart
Federal tax on a $100,000 gain, top bracket (2026)
Calculator
Section 1256 blended rate
Enter your marginal ordinary rate, long-term gains rate and whether NIIT applies.
Blended 60/40 rate
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Tax at 60/40
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Tax if all short-term
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Savings
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Mark to Market
What does mark to market mean for Section 1256?
Any Section 1256 contract you still hold on the last business day of the year is treated as sold at its fair market value, and the gain or loss is reported for that year. When you later close the position, the gain or loss is adjusted for what was already recognized. You cannot defer a gain into next year by holding an open futures or SPX position across December 31.
Trade normally
Closed trades are reported at 60/40.
Open positions marked
Unrealized gains and losses are taxed as if closed.
Basis adjusted
Later gain or loss is measured from the year-end value.
Form 6781
Brokers report aggregate Section 1256 profit or loss on Form 1099-B.
Where Embark fits
60/40 treatment lowers the tax on index option income. What could your own stock target in income?
Run your ticker to see the income target with $0 tax at contribution.
- No option account, strike selection or monthly rolling required to pursue income
- §721 in-kind contribution of the stock you own: $0 tax at contribution
- Targets 10%+ annual income; a target, not a guarantee, with a 3-year lock-up
Run the numbers
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Losses
Can Section 1256 losses be carried back?
Yes, with an election. An individual with a net Section 1256 loss can elect under §1212(c) to carry it back up to three years, but only against net Section 1256 gains in those years. The carried-back loss keeps its 60/40 character. Any amount not absorbed carries forward as a normal capital loss. The election is made on Form 6781.
Practical Uses
Who benefits most from Section 1256 treatment?
Index option sellers
Premium from SPX or XSP puts and calls is taxed 60/40 instead of short-term.
Futures traders
Every trade gets the blended rate, even if held for minutes.
Box spread borrowers
The implied interest on an SPX box spread loan shows up as a 60/40 capital loss.
High-bracket investors
The saving grows with the gap between ordinary and long-term rates.
Embark
Is there a tax-efficient route to income on appreciated stock?
Section 1256 lowers the tax rate on index option income, but you still need cash or margin to run the strategy. If your capital is in one appreciated stock, Embark accepts it in kind under §721, with $0 tax at contribution, and targets 10%+ annual income. Target, not guarantee; 3-year lock-up; accredited investors only.
FAQ
Frequently asked questions
What are examples of Section 1256 contracts?
Regulated futures, options on futures, and listed options on broad-based indexes such as SPX, NDX, RUT and VIX.
Are SPY options Section 1256 contracts?
No. SPY is an ETF, so its options are equity options taxed under the normal holding-period rules.
What is the 60/40 rule?
Section 1256 gains and losses are treated as 60% long-term and 40% short-term capital gains or losses.
What form reports Section 1256 contracts?
IRS Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.
Are Section 1256 contracts marked to market?
Yes. Open positions are treated as sold at fair market value on the last business day of the year.
Can you carry back Section 1256 losses?
Yes. An election under §1212(c) lets individuals carry net Section 1256 losses back three years against Section 1256 gains.
Sources
Primary sources
Sources
- 26 U.S. Code §1256: Section 1256 contracts marked to market (60/40 rule)
- 26 U.S. Code §1212(c): Carryback of losses from Section 1256 contracts
- IRS: About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
- IRS Publication 550: Investment Income and Expenses (options and Section 1256)
- 26 U.S. Code §1411: Net investment income tax
- IRS Revenue Procedure 2025-32: 2026 tax brackets
- Cboe: SPX options contract specifications (European-style, cash-settled)
Cite this article
Embark Funds Research. “Section 1256 Contracts The 60/40 Rule, Explained.” Embark Funds, updated October 29, 2026. https://www.embarkfunds.com/insights/section-1256-contracts-60-40-tax
Not tax, legal or investment advice: This article is educational and is not tax, legal, investment or Medicare advice. Rules and dollar amounts change every year and depend on your facts. Work with a CPA or financial planner before acting. Embark income figures are targets, not guarantees. Contributed shares have a 3-year lock-up, and Embark is open to accredited investors only.
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