Jump to the Good Stuff

The 60/40 rule is a tax break for futures traders that lets you report 60% of your gains as long-term capital gains and 40% as short-term, no matter how long you held the position. That’s huge because long-term rates are often half of ordinary income rates.

I’ve been trading futures for over a decade, and I still see people messing this up. Most brokers don’t even explain it properly. So let’s break it down the way I wish someone had for me.

The Basics of the 60/40 Rule

This rule comes from Section 1256 of the U.S. Internal Revenue Code. It applies to regulated futures contracts, foreign currency contracts, and certain options. For these instruments, any gains and losses are treated as if 60% were long-term capital gains and 40% were short-term capital gains — regardless of how long you actually held them.

The beauty? Long-term capital gains tax rates are lower than ordinary income tax rates for most people. So even if you day-trade futures and hold positions for minutes, you still get this favorable split. And it works both ways — if you have losses, 60% of those losses are treated as long-term capital losses.

There’s a catch though: futures contracts are marked-to-market at the end of each tax year. That means unrealized gains and losses are treated as if you sold everything on December 31. So even if you hold a position into the next year, you’ll pay tax on the paper gains now. But for active traders, this is often worth it.

Key takeaway: The 60/40 rule gives futures traders a built-in tax advantage exclusive to Section 1256 contracts.

How the 60/40 Rule Works: A Concrete Example

Let’s say you traded E-mini S&P 500 futures during the year and ended up with $10,000 in net profit. Under the 60/40 rule:

  • 60% = $6,000 is treated as long-term capital gain
  • 40% = $4,000 is treated as short-term capital gain

Now, suppose your ordinary income tax bracket is 32% and your long-term capital gains tax rate is 15% (this varies by income level).

If the entire $10,000 were short-term, you’d owe $3,200 in tax (32% × $10,000). But with 60/40:

  • Long-term part: 15% × $6,000 = $900
  • Short-term part: 32% × $4,000 = $1,280
  • Total tax = $2,180

That’s a savings of $1,020 (from $3,200 to $2,180). Now imagine doing that year after year. It adds up.

Let’s look at a comparison table for different profit levels:

Taxable Future GainAll Short-Term (32%)60/40 Split (15% + 32%)You Save
$5,000$1,600$1,090$510
$10,000$3,200$2,180$1,020
$25,000$8,000$5,450$2,550
$50,000$16,000$10,900$5,100

Note: This example assumes your long-term rate is 15% and your ordinary rate is 32%. Actual rates depend on your total taxable income.

Why the 60/40 Rule Exists: The Section 1256 Advantage

Back in the 1980s, Congress wanted to encourage trading in futures and other financial markets. But they also wanted to prevent traders from deferring taxes forever by holding positions. So they devised a compromise: everyone gets taxed annually through mark-to-market, and in exchange, the effective tax rate is reduced via the 60/40 split.

This is why futures traders often get better tax treatment than stock traders. If you day-trade stocks, every gain is short-term and taxed at your ordinary rate. But day-trade futures, and you automatically get the 60/40 benefit. That’s a massive reason many active traders prefer futures.

On a personal note, I’ve always found this a bit ironic. The same government that makes ordinary investors pay high taxes on short-term stock gains gives a break to futures traders. But hey, it’s legal and it’s there for you to use.

Who Qualifies for the 60/40 Rule?

Not every futures contract qualifies. Under Section 1256, these assets are eligible:

  • Regulated futures contracts – anything traded on a designated contract market (like CME, CBOT, NYMEX)
  • Foreign currency contracts – if they meet certain criteria for active trading
  • Non-equity options – options on futures, commodities, and broad-based stock indexes (e.g., S&P 500 index options, Nasdaq options)
  • Dealer equity options – under certain rules

Important: Regular stock options (like options on AAPL) are not covered. They use standard holding period rules. So don’t assume all your option trades get this break.

If you trade crypto futures on an unregulated exchange, they may not qualify. But if they’re listed on a regulated exchange (like CME), they usually do. Check with your tax pro.

Tax Filing Steps: What You Need to Report

To report your futures gains correctly, you’ll need to use IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles). Here’s the drill:

  1. Your broker sends you a Form 1099-B that summarizes your futures transactions for the year.
  2. You enter the details on Form 6781. This form calculates the 60/40 split automatically.
  3. The bottom line from Form 6781 gets transferred to Schedule D.
  4. Then the result flows into your Form 1040.

A common pain point: because of mark-to-market, you’ll pay tax on unrealized gains even if you didn’t sell anything. But you also get to deduct unrealized losses, which can offset other income (subject to capital loss limits).

I always tell new traders: don’t ignore Form 1099-B. Some brokers only give a summary page, but you need the detailed cost basis breakdown to fill out 6781 correctly. If you use tax software, it usually handles the heavy lifting.

Common Mistakes Traders Make (and How to Avoid Them)

Here are the biggest errors I see in my decade of trading and coaching others:

  • Assuming every option qualifies. Stock options are not Section 1256 contracts. Only index options and future options are.
  • Forgetting about mark-to-market. Even if you didn’t sell your losing positions, you might have a taxable gain. Plan ahead.
  • Not tracking fees. Trading commissions and fees can be deducted. They reduce your net gain, so track them.
  • Ignoring wash sale rules for futures. While futures don’t have classic wash sale rules like stocks, there are straddle rules that can defer losses. If you close and repurchase within 30 days, watch out.
  • Mixing up long-term vs. short-term loss limits. The 60/40 rule applies to the character of the gain, but your net capital losses can only deduct up to $3,000 of ordinary income each year (if you’re single).
Pro tip: If you have a bad year, you can carry forward those losses to offset future gains. But you have to file correctly to claim them.

FAQ: Your Burning Questions Answered

I trade futures and stocks. How does the 60/40 rule interact with my stock gains?
They’re completely separate. Your stock gains follow standard rules (short-term if held less than a year, long-term if more). Futures gains always get the 60/40 split. You’ll report them on different parts of Schedule D. Don’t combine them — it could mess up your tax rate.
Can I use my futures losses to offset my W-2 income?
Yes, but with limits. After netting all your gains and losses, if you have a net capital loss, you can deduct up to $3,000 against ordinary income each year (per person). Any leftover carries forward to future years. So if you had a $10,000 futures loss, you might deduct $3,000 this year and carry $7,000 forward.
Do crypto futures traded on Binance get the 60/40 rule?
Only if the contracts are “regulated futures contracts” as defined by the IRS. Futures on unregulated crypto exchanges typically don’t qualify, so they’re taxed as ordinary property. But some crypto futures on CME do qualify. Check whether the exchange is a designated contract market (DCM) with the CFTC. If you’re unsure, talk to a tax accountant who understands crypto.

This article was fact-checked against IRS Publication 550 and the official instructions for Form 6781. Tax laws are complex and change, so always confirm with a licensed tax professional.