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Tax Treatment of Futures Contracts
Futures contracts traded on regulated U.S. futures exchanges are covered by Section 1256 of the Internal Revenue Code. There are certain differences in tax policy when comparing futures with equities and fixed income. First, regardless of the holding period of a futures contract, net gains or losses for the year are allocated 60% to long term and 40% to short term capital gain. Second, all unrealized gains or losses at yearend are marked to market and included in the net gain or loss for the year. Third, if an investor has a net loss from futures in the current year he may carry-back the loss for up to three years against prior year futures gains and file an amended return to recapture prior year taxes paid. As an alternative he may either apply the loss to other securities gains or carry it forward to offset future year gains. In addition to gains or losses from transactions, if the account earns interest the interest income will be subject to normal tax treatment of the interest income.
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