Section 1256 60/40 Tax Rule for ES, MES and SPX Traders
4 min read · Updated
If you day trade ES, MES or SPX options in the US, your gains are taxed under Section 1256 of the tax code. That one rule changes the rate you pay, the form you file and how losses carry.
This guide covers what I check each year. I am not a tax advisor, so confirm your own case with a CPA.
What Section 1256 covers
- Regulated futures contracts, such as ES and MES on the CME.
- Broad-based index options, such as SPX and XSP options on Cboe.
- Foreign currency contracts and some dealer options, which most day traders never touch.
SPY shares and SPY options are left out. SPY is an ETF, so its trades follow the normal stock rules: under one year is short term, taxed at your ordinary rate.
The 60/40 split
Every Section 1256 gain or loss is treated as 60% long term and 40% short term. Holding time plays no part. A trade held for 30 seconds gets the same split as one held for 11 months.
For a trader in the top federal bracket, that works out like this:
- 60% at the 20% long-term rate = 12%
- 40% at the 37% short-term rate = 14.8%
- Blended top rate: 26.8%, against 37% for the same gain made on SPY.
The 3.8% net investment income tax and state tax can apply on top of both. Lower brackets save less, and the 0% long-term bracket can make the gap bigger.
Mark to market on December 31
Any Section 1256 contract still open at year end is treated as sold at its fair market value on the last business day. You pay tax on the open gain, or take the open loss, for that year. Next year your cost starts at that marked price, so the same gain is never counted twice.
For a day trader who is flat every night, this rarely changes anything. It counts when you hold a swing position over New Year.
Form 6781 and the 1099-B
Your broker sends one total for Section 1256 contracts on the 1099-B, usually in boxes 8 to 11, the aggregate profit or loss. You put that number on Part I of Form 6781. The form splits it 60/40 and sends the two parts to Schedule D. You do not list each trade, which makes futures returns shorter than a year of stock trades.
Wash sales
Because Section 1256 contracts are marked to market, the wash sale rule is generally treated as not applying to them. A loss on ES that you re-enter a minute later still counts that year. Stock and SPY option losses can still be deferred by a wash sale, so traders who mix SPY and ES keep the two apart in their records.
Carrying a loss back three years
An individual with a net Section 1256 loss can elect to carry it back up to three years, against Section 1256 gains in those years only. You make the election by checking box D on Form 6781 and filing an amended return or Form 1045 for the earlier year. Any amount left over carries forward like a normal capital loss.
ES, SPX or SPY: what the tax rule means for your choice
The levels move together, since ES, SPX and SPY all track the S&P 500. The tax and the contract size are what differ:
- ES: $50 a point, Section 1256, trades nearly 24 hours.
- MES: $5 a point, Section 1256, good for smaller accounts.
- SPX options: $100 multiplier, Section 1256, cash settled.
- SPY: shares or options, normal stock tax rules, the smallest step size.
My Trade Plans post levels for SPY and ES side by side, so you can plan on whichever you trade. To move a level between them, use the ES to SPY converter.
Trader tax status is a separate question
Section 1256 is about the contracts. Trader tax status, and the Section 475 mark-to-market election, are about you as a trader. A Section 475 election turns gains into ordinary income and can take away the 60/40 benefit on futures unless you keep them out of it. Talk to a CPA before you elect it.
FAQ
Are ES futures taxed 60/40?
Yes. ES and MES are regulated futures contracts under Section 1256, so gains and losses are 60% long term and 40% short term, whatever the holding period.
Are SPY options Section 1256 contracts?
No. SPY options are options on an ETF, so they follow the normal stock rules. SPX and XSP options are broad-based index options and do get 60/40.
Which form do I file?
Form 6781, Part I, with the total from your 1099-B. The result flows to Schedule D.
Do I pay tax on an open futures position at year end?
Yes. Open Section 1256 contracts are marked to market on the last business day of the year, and the open gain or loss counts for that year.
Sources
- IRS, About Form 6781
- IRS Publication 550, Investment Income and Expenses
- 26 U.S. Code Section 1256
Educational content only. Not investment advice.