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Tax Benefits from Trading Futures & Other Section 1256 Contracts

June 20, 2012

By Robert A. Green, CPA

July 10, 2012 update: One downside of trading futures is investor protection programs like FDIC and SIPIC do not apply. The 2011 bankruptcy of MF Global highlighted this problem.

PFGBest's customer accounts were frozen by regulators on July 9, 2012, and Peregrine Financial Group Inc. may face a similar fate as MF Global with even more customer money missing percentage wise.

The main money protection for futures is a CFTC regulatory requirement to "segregate customer funds." But, with MF Global we learned that management can push the envelope on these rules, and perhaps execute fraud which can lead to missing customer funds. Futures investors need the same money protections afforded under FDIC and SIPIC. See our blogs on MF Global and money protection issues.

Did you know you can lower your tax rate and get other tax breaks by trading futures and other Section 1256 contracts?

Find out how when you join noted trader tax expert Robert A. Green, CPA & CEO of GreenTraderTax.com as he takes you through all the details in his upcoming Webinar for Rockwell Trading (see details below):

Lower tax rates apply to Section 1256 contracts: Section 1256 contracts have lower “60/40 tax rates,” which can be up to 12% less than ordinary tax rates on short-term capital gains. That’s up to a third off!

Loss carryback election: At tax-filing time, all taxpayers may elect to carryback Section 1256 losses three tax years against Section 1256 gains. With mark-to-market accounting included in Section 1256, onerous wash sale rules don’t apply, and that saves traders added tax costs and headaches.

Easier accounting and tax reporting: Securities traders are facing a nightmare at tax time dealing with the IRS’s new cost-basis reporting rules being phased in starting in 2011 and ending in 2014. (Read about the cost-basis reporting crisis for securities traders on the GreenTraderTax.com Website.) But accounting is simple for Section 1256 contract traders. A broker-provided Form 1099-B for Section 1256 contracts is a one-page form and the net taxable 60/40 gain or loss amount is separately stated at the bottom.

Section 1256 includes many instruments: Not just futures contracts, but also non-equity options including options on indexes, options on futures, most ETF options, broad-based indexes, many foreign futures and electing forex traders in forwards and sometimes spot.

Tax benefits for investors versus business traders: Although, Section 1256 tax advantages are not predicated on having trader tax status (business treatment), active traders can unlock additional tax breaks if they qualify for trader tax status. Business traders can also form a trading entity saving thousands more with AGI deductions for retirement-plan contributions and health-insurance premiums.

Watch Mr. Green's Webinar dated June 28, 2012. Click here http://www.greencompany.com/EducationCenter/InteractiveSeminars.shtml

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