Overview
Form 6781 (Gains and Losses From Section 1256 Contracts and Straddles) is the IRS form used to report year‑end gains and losses on:
– Section 1256 contracts (for example, many regulated futures contracts, certain foreign currency contracts, dealer equity options and dealer securities futures contracts), and
– Straddles (offsetting option/other positions subject to the straddle rules).
Section 1256 contracts are “marked to market” at year‑end — treated as if sold for fair market value (FMV) on December 31 — and, for tax purposes, gains/losses from these contracts receive special 60/40 tax treatment: 60% long‑term capital gain or loss and 40% short‑term, regardless of actual holding period.
Quick takeaways
– Who files: taxpayers who hold Section 1256 contracts or have positions subject to the straddle rules. Most futures/options traders will use Form 6781.
– Tax effect: net Section 1256 gains/losses are allocated 60% long‑term / 40% short‑term.
– Mark‑to‑market: open 1256 contracts are valued at FMV on 12/31 and treated as sold that day for tax purposes.
– Where it goes: the result from Form 6781 is carried to Schedule D of Form 1040 (follow form instructions).
What counts as a Section 1256 contract?
Common examples:
– Regulated futures contracts (exchange‑traded futures)
– Non‑equity options that are designated as Section 1256 contracts
– Certain foreign currency contracts
– Dealer equity options and dealer securities futures contracts
Some foreign exchange contracts that would otherwise not be 1256 contracts may still be treated as such for U.S. tax reporting — read the IRS instructions or consult a tax advisor.
What is an options straddle?
A straddle exists when you hold offsetting positions that substantially diminish risk of loss. The classic retail example is buying a call and a put on the same underlying with the same strike price and expiration (a long straddle). Straddle tax rules under Section 1092 can require special recognition and allocation of gains and losses and interact with Form 6781 reporting.
What does “mark‑to‑market” mean here?
For Section 1256 contracts, mark‑to‑market means you treat each open contract as if it were sold at its fair market value on December 31. That construct establishes realized gain or loss for the tax year even though you still hold the position.
Example:
– Buy a regulated futures contract on May 5 for $25,000. On Dec. 31 it’s valued at $29,000 — a $4,000 gain for 2024.
– That $4,000 is reported on Form 6781 and taxed 60% long‑term / 40% short‑term.
– If you sell the contract on Jan. 30, 2025 for $28,000, you recognize a $1,000 loss in 2025 (28,000 − the 12/31 value 29,000), again split 60/40.
Why 60/40 is beneficial
Long‑term capital gains are taxed at lower federal rates (0%, 15%, 20% depending on taxable income) than ordinary income rates (up to 37%). The 60/40 split lets traders treat a majority of gains at the more favorable long‑term rates even if contracts were held less than a year.
How Form 6781 is structured (high level)
– Part I: Section 1256 contracts — report sales/proceeds or mark‑to‑market FMV on 12/31 and compute net gain/loss; apply 60/40 allocation.
– Part II: Straddles — has Section A for losses and Section B for gains; special computations apply.
– Part III: Unrecognized gain on positions held at year‑end (used in certain straddle/loss situations).
Practical, step‑by‑step filing process
1. Identify your positions
– Determine which positions are Section 1256 contracts and which are straddle positions. Check broker statements and contract types; review IRS guidance if unsure.
2. Gather records for the tax year
– Trade confirmations, broker 1099‑B or consolidated 1099s, exchange settlement prices, 12/31 statements showing open‑position values, and any relevant broker year‑end reports.
3. Determine 12/31 fair market values for open positions
– For exchange‑traded contracts, use the exchange’s Dec. 31 settlement prices or broker‑provided 12/31 FMV.
– For non‑exchange contracts you claim as 1256 (if applicable), use reliable valuation consistent with IRS rules.
4. Compute gains and losses
– For each Section 1256 contract, compute gain/loss as: (sale or FMV on 12/31) − (adjusted basis).
– For straddles, follow the Part II instructions for recognizing losses and gains; if you recognized a loss on a position that has an offsetting unrecognized gain at year‑end, part III rules may apply.
5. Complete Form 6781
– Enter Section 1256 gains/losses in Part I and calculate the 60/40 split.
– Complete Part II and Part III if you have straddles or unrecognized gains.
– Attach any required statements and documentation that the IRS requires or that your broker provides.
6. Transfer totals to your tax return
– Net results from Form 6781 flow to Schedule D (Capital Gains and Losses) of Form 1040 (follow the Form 6781 instructions for the exact lines to use). Form 8949 is generally not used for Section 1256 items — they are reported directly on Form 6781 and then Schedule D.
7. Keep records
– Retain all trade confirmations, valuation evidence and broker statements for at least the period required by IRS (generally three years, often longer for basis adjustments or audits).
Common filing pitfalls and practical tips
– Don’t ignore mark‑to‑market: think year‑end for 1256 contracts as a tax “sale” even if you still hold positions.
– Broker 1099s may not fully reconcile; verify totals and don’t rely blindly on a 1099‑B.
– Correctly identify straddles — misclassifying can cause wrong gain/loss recognition.
– If you have foreign contracts or atypical instruments, confirm whether they qualify as Section 1256 with the IRS rules or a tax pro.
– Hedging rules and straddle interactions can be complex. If you use options as hedges for other positions, get professional help.
– Attach supporting statements to your return when required or when a broker’s summary needs backing up.
When to consult a professional
– You trade both hedges and speculative positions or maintain complex option spreads and straddles.
– You have foreign contracts or nonstandard instruments that may or may not be Section 1256.
– You’ve got substantial, frequent activity and the tax impact (including state tax issues) matters materially.
Where to get Form 6781 and official guidance
– IRS Form 6781 and its instructions: https://www.irs.gov/forms-pubs/about-form-6781
– Federal tax code: 26 U.S. Code § 1256 (Section 1256 contracts mark‑to‑market) — for legal definitions.
– IRS Topic No. 409 (Capital Gains and Losses) for general capital gains guidance.
Bottom line
Form 6781 is essential for traders handling Section 1256 contracts and many straddle situations because it implements year‑end mark‑to‑market accounting and the favorable 60/40 capital gain/loss split. Accurate identification of contract types, consistent year‑end valuations, and careful recordkeeping are the keys to preparing this form correctly. For complex straddles, hedges, or nonstandard instruments, consult a tax advisor experienced with derivatives and trader taxation.
Sources
– IRS, “About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles,” and Form 6781 instructions.
– 26 U.S.C. § 1256 (Section 1256 Contracts Marked to Market).
– Investopedia, “Form 6781” overview.
,
Title: Form 6781 — Gains and Losses From Section 1256 Contracts and Straddles (What It Is, Who Files, and How to Complete It)
Overview
Form 6781 (Gains and Losses From Section 1256 Contracts and Straddles) is the IRS form used to report year‑end gains and losses on:
– Section 1256 contracts (for example, many regulated futures contracts, certain foreign currency contracts, dealer equity options and dealer securities futures contracts), and
– Straddles (offsetting option/other positions subject to the straddle rules).
Section 1256 contracts are “marked to market” at year‑end — treated as if sold for fair market value (FMV) on December 31 — and, for tax purposes, gains/losses from these contracts receive special 60/40 tax treatment: 60% long‑term capital gain or loss and 40% short‑term, regardless of actual holding period.
Quick takeaways
– Who files: taxpayers who hold Section 1256 contracts or have positions subject to the straddle rules. Most futures/options traders will use Form 6781.
– Tax effect: net Section 1256 gains/losses are allocated 60% long‑term / 40% short‑term.
– Mark‑to‑market: open 1256 contracts are valued at FMV on 12/31 and treated as sold that day for tax purposes.
– Where it goes: the result from Form 6781 is carried to Schedule D of Form 1040 (follow form instructions).
What counts as a Section 1256 contract?
Common examples:
– Regulated futures contracts (exchange‑traded futures)
– Non‑equity options that are designated as Section 1256 contracts
– Certain foreign currency contracts
– Dealer equity options and dealer securities futures contracts
Some foreign exchange contracts that would otherwise not be 1256 contracts may still be treated as such for U.S. tax reporting — read the IRS instructions or consult a tax advisor.
What is an options straddle?
A straddle exists when you hold offsetting positions that substantially diminish risk of loss. The classic retail example is buying a call and a put on the same underlying with the same strike price and expiration (a long straddle). Straddle tax rules under Section 1092 can require special recognition and allocation of gains and losses and interact with Form 6781 reporting.
What does “mark‑to‑market” mean here?
For Section 1256 contracts, mark‑to‑market means you treat each open contract as if it were sold at its fair market value on December 31. That construct establishes realized gain or loss for the tax year even though you still hold the position.
Example:
– Buy a regulated futures contract on May 5 for $25,000. On Dec. 31 it’s valued at $29,000 — a $4,000 gain for 2024.
– That $4,000 is reported on Form 6781 and taxed 60% long‑term / 40% short‑term.
– If you sell the contract on Jan. 30, 2025 for $28,000, you recognize a $1,000 loss in 2025 (28,000 − the 12/31 value 29,000), again split 60/40.
Why 60/40 is beneficial
Long‑term capital gains are taxed at lower federal rates (0%, 15%, 20% depending on taxable income) than ordinary income rates (up to 37%). The 60/40 split lets traders treat a majority of gains at the more favorable long‑term rates even if contracts were held less than a year.
How Form 6781 is structured (high level)
– Part I: Section 1256 contracts — report sales/proceeds or mark‑to‑market FMV on 12/31 and compute net gain/loss; apply 60/40 allocation.
– Part II: Straddles — has Section A for losses and Section B for gains; special computations apply.
– Part III: Unrecognized gain on positions held at year‑end (used in certain straddle/loss situations).
Practical, step‑by‑step filing process
1. Identify your positions
– Determine which positions are Section 1256 contracts and which are straddle positions. Check broker statements and contract types; review IRS guidance if unsure.
2. Gather records for the tax year
– Trade confirmations, broker 1099‑B or consolidated 1099s, exchange settlement prices, 12/31 statements showing open‑position values, and any relevant broker year‑end reports.
3. Determine 12/31 fair market values for open positions
– For exchange‑traded contracts, use the exchange’s Dec. 31 settlement prices or broker‑provided 12/31 FMV.
– For non‑exchange contracts you claim as 1256 (if applicable), use reliable valuation consistent with IRS rules.
4. Compute gains and losses
– For each Section 1256 contract, compute gain/loss as: (sale or FMV on 12/31) − (adjusted basis).
– For straddles, follow the Part II instructions for recognizing losses and gains; if you recognized a loss on a position that has an offsetting unrecognized gain at year‑end, part III rules may apply.
5. Complete Form 6781
– Enter Section 1256 gains/losses in Part I and calculate the 60/40 split.
– Complete Part II and Part III if you have straddles or unrecognized gains.
– Attach any required statements and documentation that the IRS requires or that your broker provides.
6. Transfer totals to your tax return
– Net results from Form 6781 flow to Schedule D (Capital Gains and Losses) of Form 1040 (follow the Form 6781 instructions for the exact lines to use). Form 8949 is generally not used for Section 1256 items — they are reported directly on Form 6781 and then Schedule D.
7. Keep records
– Retain all trade confirmations, valuation evidence and broker statements for at least the period required by IRS (generally three years, often longer for basis adjustments or audits).
Common filing pitfalls and practical tips
– Don’t ignore mark‑to‑market: think year‑end for 1256 contracts as a tax “sale” even if you still hold positions.
– Broker 1099s may not fully reconcile; verify totals and don’t rely blindly on a 1099‑B.
– Correctly identify straddles — misclassifying can cause wrong gain/loss recognition.
– If you have foreign contracts or atypical instruments, confirm whether they qualify as Section 1256 with the IRS rules or a tax pro.
– Hedging rules and straddle interactions can be complex. If you use options as hedges for other positions, get professional help.
– Attach supporting statements to your return when required or when a broker’s summary needs backing up.
When to consult a professional
– You trade both hedges and speculative positions or maintain complex option spreads and straddles.
– You have foreign contracts or nonstandard instruments that may or may not be Section 1256.
– You’ve got substantial, frequent activity and the tax impact (including state tax issues) matters materially.
Where to get Form 6781 and official guidance
– IRS Form 6781 and its instructions: https://www.irs.gov/forms-pubs/about-form-6781
– Federal tax code: 26 U.S. Code § 1256 (Section 1256 contracts mark‑to‑market) — for legal definitions.
– IRS Topic No. 409 (Capital Gains and Losses) for general capital gains guidance.
Bottom line
Form 6781 is essential for traders handling Section 1256 contracts and many straddle situations because it implements year‑end mark‑to‑market accounting and the favorable 60/40 capital gain/loss split. Accurate identification of contract types, consistent year‑end valuations, and careful recordkeeping are the keys to preparing this form correctly. For complex straddles, hedges, or nonstandard instruments, consult a tax advisor experienced with derivatives and trader taxation.
Sources
– IRS, “About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles,” and Form 6781 instructions.
– 26 U.S.C. § 1256 (Section 1256 Contracts Marked to Market).
– Investopedia, “Form 6781” overview.