What is the USA tax rate on futures trading profits?

Discussion in 'Index Futures' started by canadian_dude, Jun 7, 2002.

  1. I am in Canada right now, so it doesn't apply to my situation this year, but I am curious.

    I have heard the tax rate for profits on trading futures is a lot less than trading stocks. What are the exact maximum tax rates for each category of taxation in the USA? How do they compare?
     
  2. tntneo

    tntneo Moderator

    "Marked to Market Rules

    A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below.

    Hedging exception. The marked to market rules do not apply to hedging transactions. See Hedging Transactions, later.

    60/40 rule. Under the marked to market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long you actually held the property.

    Example. On June 23, 2000, you bought a regulated futures contract for $50,000. On December 31, 2000 (the last business day of your tax year), the fair market value of the contract was $57,000. You recognized a $7,000 gain on your 2000 tax return, treated as 60% long-term and 40% short-term capital gain.

    On February 2, 2001, you sold the contract for $56,000. Because you recognized a $7,000 gain on your 2000 return, you recognize a $1,000 loss ($57,000 - $56,000) on your 2001 tax return, treated as 60% long-term and 40% short-term capital loss. "

    This is for mark to market, I am not sure otherwise.
    long term tax rate is lower than short term (usually you get it when you hold stocks for 5 years. futures are advantageous because even if you hold them for 10 seconds, 60% will be considered long term).
     
  3. ctrader

    ctrader

    trading futures?
     
  4. bone

    bone

    The blended capital gains tax treatment for 1256 futures is capped at 28%. This is quite nice. Doesn't matter how much you make. Also, you can deduct full business-related expenses. Generally speaking, individual traders SHOULDN'T elect for marked-to-market accounting.
     
  5. MarkHyman

    MarkHyman Advanced Futures

    Futures are generally treated more favorably and recieve "60/40"
    treatment. Equities require a longer holding period for favorable tax treatment.

    Example:

    Trader "A" makes $10,000 in profits over 1 week trading Intel

    Trader "B" makes $9,800 in profits over 1 week trading E-minis

    Which trader would you rather be? (assuming 39.6% bracket)

    Trader "A" Pays IRS $10,000 X .396 =$3,960

    Trader "B" Pays IRS $9,800 X .60 X .20 =$1,176
    plus Pays IRS $9,800 X .40 X .396 =$1,552

    60/40 blend results in tax rate of 27.8% or =$2,728

    =$1,232 tax savings
     
  6. Does this 60/40 tax treatment apply to e-minis like NQ and ES?
     
  7. LelandC

    LelandC

    What about Self Employment tax when it comes to futures trading? I know that a trader in securities (equities) doesn't have to pay SE tax (FICA) under the Trader Status rules....

    Leland
     
  8. MarkHyman

    MarkHyman Advanced Futures

    Yes., it does apply to the S&P and Nasdaq Futures
     
  9. josbarr

    josbarr


    All Futures whether it's S&P 500 or Pork Bellies.
     
  10. Does this 60/40 tax treatment also apply to options on futures?
     
    #10     Jun 19, 2002