How Section 1256 Contracts Can Reduce Taxes for Investors
For most individual taxpayers, capital losses are limited to a $3,000 deduction per year, with any extra losses carried forward to future years. This can delay the tax benefits of those losses.
However, there’s an exception for certain investments called Section 1256 contracts, which include specific types of futures, foreign currency, and commodity options. These contracts get special tax treatment, including a 60/40 split of long-term and short-term capital gains, no matter how long the investment is held. This can be helpful for investors looking to minimize their tax bills.
One big benefit of Section 1256 contracts is that capital losses can be carried back for up to three tax years prior to the year of the loss to offset and reduce capital gains earned in those years. This means if you lose money on these investments, you can apply that loss to offset gains in previous years, getting an immediate tax benefit. This is different from other types of investments, where you can only carry forward losses. To do this, taxpayers must file a special election with their return using IRS form 6781 in the year of loss, and may need to amend one or more prior years’ returns. The amended returns are the application process to apply for tax refunds based on reduced income. This process can be complex, so it’s important to work with a CPA who understands these rules.
If you would like to learn more about opportunities regarding 1256 Contracts, your ShindelRock team is here to help you.