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Please consult your tax advisor for your individual tax situation.
According to the Tax Act of 1981, short-term profits in commodities are treated as 60% long term and 40% short term. On the other hand, short term trading profits in stocks are treated as 100% short term. A short-term investment is one that is held for less than one year. This favorable tax treatment in commodities can translate to investors in upper tax brackets, saving as much as 30% on taxes in short term gains on commodities versus stocks!
Exchange traded commodities are covered under Internal Revenue Code section 1256 which are known as Regulated Futures Contracts ("RFCs"). They have a different tax treatment from any other financial product. The treatment of RFCs under section 1256 is that 60% of the gain/losses are treated as long-term and 40% are treated as short-term capital gains/losses. Unlike securities, there is no holding period and all section 1256 contracts receive this treatment. The holding period for securities is at least one year in order to qualify for long-term capital gain treatment. Open trade profits or losses are treated as realized and the 60/40 rule is applied to gross profit/loss for the year. There is a significant tax advantage for investors who participate in the managed futures market since they can utilize the 60/40 tax treatment without regard to the holding period.
The current maximum tax rate is currently 35% which would apply to ordinary income and short term securities gains/losses. The current rate on long term capital gains is 15%. The current maximum blended rate for section 1256 contracts is 23%.
The section 1256 contracts are reported on Form 6781 which then flows through to Schedule D. Click here to see an example of how these forms would be filled out using a $600,000 gain.
Please consult your tax advisor for your individual tax situation.
Past performance is not necessarily indicative of future results. The risk of substantial loss exists in futures and options trading
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