Question on 60/40 rule for Futures Taxes

Discussion in 'Taxes and Accounting' started by KK70, Dec 3, 2003.

  1. KK70


    Hi folks,

    I have a modest profit to show this year after trading the S&P500 E-mini.

    I understand that profits on futures transactions are taxed as follows -- 60% of the profit is taxed as long term capital gains and the remaining 40% is treated as regular income and taxed accordingly.

    My question is -- Is the long term capital gains rate fixed at a flat 15% for computing taxes on futures trades?

    Thanks in advance,
  2. I'll give you a general answer to your question to get you started on your research.

    The ES qualifies as a section 1256 contract and is therefore taxed under the 60/40 rule. The 60/40 rule says 60% of your gains or losses are long-term capital gains or losses and 40% are short-term regardless of your holding period. This applies to both long and short trades.

    For 2003, the rates for long-term capital gains have been changed to 15% (5% if you're in the lowest tax bracket), but only on gains recognized after May 5, 2003. LTCG recognized on or before May 5, 2003 are taxed at 20% (10% for lowest tax bracket taxpayers).

    So the general answer to your question is 15% on LTCG after May 5 and 20% on LTCG on or before May 5, assuming you're not in the lowest tax bracket.

    One final note: all your gains and losses from the ES are capital in character. While it is true that short-term capital gains are taxed at ordinary income rates, they are not treated the same as ordinary income (e.g., wages). This is important to keep in mind for netting purposes and the capital loss limitation and carryover rules.

  3. KK70



    Thank you for taking the trouble to reply. Most grateful.

    Just a quick follow-up question -- what do you mean by lowest tax bracket ? i.e. what is the income that one should have earned to be in the lowest tax bracket?

    Thanks again!
  4. I'm referring to a taxpayer whose taxable income is taxed at no higher than the lowest marginal income tax rate. Whether that applies to you depends on your filing status (married filing joint, single, etc.) and your taxable income (i.e., income after deductions, exemptions, etc.).

    For 2003, the lowest marginal tax rate is 10% and applies to taxable income of up to $14,000 if you're a joint filer or $7,000 if a single filer. The lower LTCG tax rate (5% or 10% depending on the date recognized) applies to these taxpayers otherwise they would be taxed at a higher rate on their LTCG than on their wages, which would make little sense from a tax policy perspective.

    I'm assuming anyone trading futures would not be in this category, but I've been known to be wrong in the past.

  5. I think icarus618 gave a very thoughtful and extensive answer, and I agree with it. I will comment that the net capital gain would be taxed at 5% to the extent there is any room in the taxpayer's 10% or 15% bracket "glass"--but there may not be any "room in the glass." If not, then it would get taxed at 15% as icarus618 indicates, assuming the gain was incurred after the May 6 date.
  6. cwjcntr


    Does the same apply for Single Stock Futures as well?
  7. no they are treated like equities.
  8. I agree. Unfortunately, they do not receive the favorable tax treatment of section 1256 contracts.