Tax treatment for short-term capital gains/losses is considerably different from long-term capital gains/losses. Let’s break down what defines a short-term gain from a long-term gain.
Short-Term Capital Gains/Losses
A position held for 365 days or less
When a position is held for 365 calendar days or less, it falls under the short-term umbrella. Typically, short-term capital gains are taxed at an individual’s ordinary tax rate. In very simple terms, if you made $10,000 from trading positions held for less than a year and you fell under the 25% tax bracket, then $2,500 ($10,000 x 25%) of your gains would be subject to taxes.
Long-Term Capital Gains/Losses
A position held for 366 days or more
When a position is held for 366 calendar days or longer, it falls under long-term capital gains. This means that any position held for more than one-year (365 days + 1 day) is subject to a lower tax rate, typically in the neighborhood of 15%-20%, depending on your tax bracket. This means if you made $10,000 from a stock position you have held for more than a year and fell under the 25% tax bracket, then you are only on the hook for 15% instead of your ordinary income tax rate.
What is a Section 1256 Contract (Regulated Futures Contracts)?
Futures and Cash-Settled Index options
Where do these Section 1256 Contracts fit in? If you have traded options on any cash-settled index, such as the SPX, NDX, VIX, or futures contract, and options on futures, any gains/losses are subject to different tax treatment– 60% long-term and 40% short-term taxes. For more information on how to file your gain or loss from Section 1256 Contracts, please click here.
Some cash-settled index options, also known as broad-based index options, include: DJX, NDX, NQX, OEX, RUI, RUT, SPX, VIX, XEO, and XSP.
This means if you had $10,000 gain throughout the year from trading the SPX and trading futures, then taxes are treated a little bit differently than straight short-term or long-term taxes.
Additionally, this tax treatment includes any Section 1256 Contract position(s) that are not closed by the end of the year since these contracts are mark-to-market each day. That means any open position(s) held from December 2019 to January 2020 will mark a profit/loss and be subject to taxes due to mark-to-market settlement.
Let’s continue our example of the trader who falls under the 25% tax bracket. The 1256 Contract tax treatment will separate 60% of the $10,000, which is $6,000, and assess 15% as long-term capital gains tax on it, or $900 ($6,000 x 15%). Moving along, 40% of the $10,000, which is $4,000, and assess 25% of as short-term capital gains, or $1,000.
Are you unclear what a cash-settled index option is? If so, then please click here to view a list of cash-settled indexes that trade options.
|Period Held||Tax Treatment||Products|
365 days or less
|Individual’s tax rate||Stock, equity/ETF options|
|Long-Term||366 days or more||15%-20%||Stock, equity/ETF options|
|1256 Contracts||N/A||60% LT, 40% ST||Futures, Options on futures, Index options|