Tax treatment for short-term capital gains/losses is considerably different from long-term capital gains/losses. Let’s break down the differences.
Short-Term Capital Gains/Losses
A position held for 365 days or less
Realized long stocks, ETFs, and equity option positions held for 365 calendar days or less fall under short-term capital gains or losses. Typically, short-term capital gains are taxed at an individual’s ordinary tax rate. As a result, if you made $10,000 from trading positions held for less than a year, then your realized profit would fall under your ordinary income tax rate. Short equities and equity options always fall under short-term.
Long-Term Capital Gains/Losses
A position held for 366 days or more
Realized long stocks, ETFs, and equity options held for 366 calendar days or more fall under long-term capital gains or losses. Long-term capital gains are subject to a lower tax rate than short-term capital gains. As a result, if you realized a $10,000 profit from a stock position you have held for more than a year, then your realized profit would fall under a tax rate lower than your ordinary income tax rate.
What is a Section 1256 Contract (Regulated Futures Contracts)?
Futures and Cash-Settled Index options
Where do Section 1256 Contracts fit in? If you traded any broad-based index options that are cash-settled, such as SPX, NDX, VIX, any outright futures contract, or option on futures, any gains/losses are subject to different tax treatment–60% long-term and 40% short-term. For more information on how to file your gain or loss from Section 1256 Contracts, please click here.
Some cash-settled index options, also known as broad-based index options, include: DJX, NDX, NQX, OEX, RUI, RUT, SPX, VIX, XEO, and XSP.
Consequently, if you realize a $10,000 gain from trading SPX and futures throughout the year, taxes are treated differently than straight short-term or long-term capital gains/losses.
Additionally, this tax treatment includes any Section 1256 Contract position(s) that are not closed by the end of the year since these contracts are mark-to-market each day. That means any open positions held from December 2020 to January 2021 will mark as a realized profit or loss due to mark-to-market settlement.
Are you unclear what a cash-settled index option is? If so, then please click here to view a list of cash-settled indexes that trade options.
|Period Held||Tax Treatment||Products|
365 days or less
|Ordinary tax rate||Stock, equity/ETF options|
|Long-Term||366 days or more||15%-20%||Stock, equity/ETF options|
|1256 Contracts||N/A||60% LT, 40% ST||Futures, Options on futures, Broad-based Index options|