This questions refers to US tax laws. Has anyone successfully claimed section 1256 treatment for options on QQQs? Options on other ETFs?
14. Does trading the options on the QQQ, DIA or SPY get 1256 tax treatment similar to cash settled index options? ANSWER: Yes, the options on the QQQs and the other exchange-traded options of index stocks are subject to the provisions of IRS Code Section 1256. On the other hand, if you are just trading the QQQ tracking stock, you would report the transactions on your Schedule D as you would regular stocks. This answer may surprise a few of you. Unfortunately, there is an old article floating around the internet that offers conflicting opinions. The information we are sharing comes from a recent internal ruling by the IRS. The QQQ, SPX, XOI, etc - are types of nonequity options. Nonequity options are options that are not directly or indirectly related to a specific equity (stock). Most if not all publicly traded index options are nonequity options and get the 1256 tax treatment. For those of you wondering, section 1256 says that any gains or losses from the sale of these securities are subject to the 60/40 rule. 60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held. So, even if you only hold the option for a day, 60% of your gain will be considered long-term and taxed at the preferential long-term capital gains rate. Nonequity options are usually reported on Form 6781, unless they are used as a hedge. A hedge would be buying, for example, the QQQ, and then selling call options against them. http://www.tradersaccounting.com/a_quest14.asp
Thanks for the quick response. Here's two followup questions: What if we replace QQQ stock with a long LEAP or other option with months until expiration. Is selling a call against it (i.e., calendar spread) still considered a hedge? Has any of this been documented in IRS regs or in case law?