Don't know if this is the right forum, but here goes: The Feds treat futures, forex, and other contracts defined in IRC § 1256, as 60% long term capital gains and 40% short term gains, irrespective of how long the contract is held. If one is successful enough to be in the highest tax bracket, that translates to 23% overall. Not bad, compared to the 35% one is normally charged for the short term capital gains made in equities trading. What I can't figure out is how to calculate income tax owed to the state on 60/40 contracts. It obviously differs from state to state, but how is the figure calculated? I live in California where we pay 9.3% (for nothing, of course). So how much does Arnold want over and above the 23% Uncle Sam already claims?
stevenpaul, great question. To begin with though FOREX is not taxed as a 1256 contract, it is taxed under the IRC 988 rules which indicates that it will be taxed as ordinary income. This can be changed to 1256 if the trader wants it changed (read when you make money), but it is not a universal election, you must keep a log for the IRS and indicate at the time you make the trade whether you want that particular trade treated as ordinary income or as 1256 income. as far as california is concerned, they do not give you a tax break on 1256 contracts, but consider any income made from them taxed as capital gain. I am sure you are correct that different states have different rules surrounding these. Hope this helps. Jim Crimmins Traders Accounting