I receive a number of questions regarding the interaction between a mark-to-market trader who also trades IRC Section 1256 contracts ... abbreviated "Sec" henceforth.
Sec 1256 contracts are defined as:
Regulated futures contracts
Foreign currency contracts
Non-equity options
Dealer equity options
Dealer securities futures contracts
By far, in my experience, the most common Sec 1256 securities are "Non-equity options," such as options on stock indexes, ie, SPX (S&P 500), DJX (Dow Industrials Composite), COMP (Nasdaq Composite) and the like.
What if a Trader in Securities has made a MTM election and trades Sec 1256 contracts? Where are the Sec 1256 contracts reported? Are they marked to market by the trader just like year-end open positions are for equity options and stock?
The above shows the Sec 1256 section of a Form 1099-B. Line 8 reflects the actual gain/loss on closed positions for the current tax year - in this case 2023. Line 9 shows any unrealized gain/loss on prior year open contracts flowing into the current tax year while line 10 shows any unrealized gain/loss on current year open positions that are carried into the next year.
As you can see, this is the same as marking to market open equity options and stock for the MTM trader. Thus, Sec 1256 contracts are already marked to market on this section of the 1099-B by the broker.
All Sec 1256 contracts are reported on Form 6781 while all "regular" MTM trading is reported on Form 4797 Part II as follows (in the first year):
Line 1 should be the Sec 481(a) adjustment and will agree to Form 3115 page 4 amount. Line 2 would be the regular MTM trading for the year and Line 3 will reflect the year-end MTM adjustment for all open positions. This is not an IRS required format but the one I use along with attaching the detail for those three lines to the tax return. Line 1 will only be used the first year of MTM trading.
So, Sec 1256 contracts are not marked to market by the trader, since they are already marked to market at the brokerage level. They are reported as a one line entry on Form 6781 per account, as follows (not the same amounts as above):
The Sec 1256 contracts are separated into long-term and short-term capital gain or loss and carried to Schedule D and if the loss is greater than $3000, then it is limited to that amount and the remaining loss is carried forward to subsequent years.
Hope this helps, and as always ... good trading ...