Section 1256 Options and the 60/40 Rule

Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026

A Section 1256 option is a listed option that the Internal Revenue Code taxes under two special rules: its gain or loss counts as 60% long-term and 40% short-term no matter how long you held it, and any contract still open at year end is treated as sold at its fair market value on the last business day of the year. For individual traders, the options that usually qualify are broad-based index options such as SPX; options on a single stock or on most ETFs, such as SPY, do not.

How Options Are Taxed covers equity options; this lesson covers the exception.

Which options are Section 1256 contracts?

Section 1256(b) lists five kinds of Section 1256 contract: regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options and dealer securities futures contracts. For an individual who is not an options dealer, the one that matters for options is the nonequity option.

The code defines a nonequity option as any listed option that is not an equity option. An equity option is one to buy or sell stock, or one whose value is determined by reference to any stock or a narrow-based security index. That leaves options on broad-based indexes on the nonequity side. Publication 550 lists debt options, commodity futures options, currency options and broad-based stock index options as nonequity options, and gives the S&P 500 as an example of a broad-based index.

In practice:

• Usually Section 1256: listed options on broad-based stock indexes, such as SPX and XSP, and options on regulated futures. Cboe's SPX and XSP pages both note potential 60/40 treatment under Section 1256, provided the investor and the strategy meet the tax code's criteria.
• Usually not: options on a single stock, which are equity options by definition, and options on ETF shares such as SPY. Cboe's article How Taxing Is Your Options Trade?, whose rate examples are from older tax years, contrasts index options with ETF options, which it says may produce short-term gains.

Whether an index counts as broad-based or narrow-based is set by a legal definition, which the code takes from section 3(a)(55) of the Securities Exchange Act, not something you decide yourself. If a product is unfamiliar, ask a tax professional. The lesson SPX vs SPY Options in Module 4C compares the two contracts in detail, with only a short pointer on tax.

How does the 60/40 rule work?

Section 1256(a)(3) treats any gain or loss on a Section 1256 contract as 40% short-term and 60% long-term. Publication 550 adds that this is true regardless of how long you actually held the property. A trade held for one day gets the same split as one held for two years.

Rates depend on your income and the tax year, so this lesson compares only how a gain is classified.

The same hypothetical $5,000 gain on an option held two months is $3,000 long-term and $2,000 short-term as a Section 1256 index option, and all $5,000 short-term as an equity or ETF option held one year or less. Losses split the same way: a $2,000 Section 1256 loss is $1,200 long-term and $800 short-term.

What is year-end mark-to-market?

Section 1256(a)(1) treats each Section 1256 contract you hold at the close of the tax year as sold for its fair market value on the last business day of that year. You report the gain or loss for that year even though you still hold the position. When you later close it, the result is adjusted for what you already reported, so nothing is taxed twice.

Publication 550 adds that the same fair-market-value rule applies when a contract is terminated or transferred during the year, including by offsetting, delivery, exercise, assignment or lapse.

The point is timing: a winning index position held over year end is taxed for a year in which you never closed it.

Where are Section 1256 contracts reported?

Publication 550 says to use Part I of Form 6781 to report gains and losses from all Section 1256 contracts that were open at the end of the year or closed out during it, including the amount in box 11 of Form 1099-B, and then to carry the net amount to Schedule D. Publication 550's options reporting instructions cover only options that are not Section 1256 contracts.

Can Section 1256 losses be carried back?

In general terms, yes. Publication 550 says an individual with a net Section 1256 contracts loss can generally elect to carry it back 3 years instead of carrying it forward. The loss carried back cannot exceed the net Section 1256 contracts gain in the earlier year, and it cannot create or increase a net operating loss there. It is applied to the earliest year first, and each carryback year treats it as 60% long-term and 40% short-term. The election is made on Form 6781 for the loss year, and the carryback is claimed with Form 1045 or an amended return.