Section 1256 Contract loss carryover

Forum|Forum|4 years ago
March 25, 2022
1 reply
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I had capital loss on index option (such as SPX option, VIX option) in 2021, and I had never traded section 1256 contract before 2021.

For this year, I rarely trade section 1256 contract anymore, so it is very likely that I will never make capital gain from section 1256 in the future.

Why does it treat Section 1256 Contract Loss differently from stock capital loss?

How does it work? For example, if I had $10,000 stock short term capital loss in 2021 and $10,000 section 1256 contract short term loss (Profit or (loss) realized in 2021 on closed contracts), then if I have $20,000 stock capital short term gain in 2022, can I deduct 2021 section 1256 contract short term loss during next year tax return form?

Anyway, what does below screenshot mean (it is for Section 1256 Contract Loss)? How should I fill it out? It is challenge to file tax return on my own this year, this is my first time dealing with Section 1256 contract.

My understanding is: I can keep this section 1256 loss for future stock capital gain, correct? I don't want amend previous tax return form, which is annoying. Probably I cannot carry it back, since I did not have any trading related to Section 1256 contract, I also claimed $3000 stock capital loss in 2020 tax return already.

How does carry back work? Deduct $3000 from salary income (W2) and reduce $3000 on taxable income?

Or does it carry back to previous year's Section 1256 contract gain only? But I did not have section 1256 contract trade record before 2021.

If I have loss on Section 1256 contract in 2021, even if there was section 1256 contract gain in 2020, can I choose not to carry back (if the gain is small, then I don't want to amend 2020 tax return form)? In stead, I would like to carry Section 1256 contract loss forward? Can section 1256 loss be offset by stock capital gain in the future? I rarely trade section 1256 now.

Thanks.

Best answer by GeorgeM777

Section 1256 contracts are taxed differently than equity option contracts. Section 1256 contracts have lower 60/40 capital gains tax rates which means 60% is subject to lower long-term capital gains rates, and 40% taxed as short-term capital gains using the ordinary rate. Your other short-term losses will be added to the Section 1256 short-term losses and the same would apply for your long-term losses. TurboTax will do the calculations for you.

There is a Section 1256 loss carryback election and that is why you see the screen you included in your post. If eligible, rather than use the 1256 loss in the current year, you may deduct 1256 losses on an amended prior year tax return; however, the carryback loss can only be applied against Section 1256 gains. Thus, if you don't have any 1256 gains from the prior year, then your only option is to include the loss this year and if you have any losses left over, then carry forward the loss to the next tax year.

Given your tax situation, you would leave the carryback box blank and continue through the rest of the screens.

@VAer

G

GeorgeM777Answer

Section 1256 contracts are taxed differently than equity option contracts. Section 1256 contracts have lower 60/40 capital gains tax rates which means 60% is subject to lower long-term capital gains rates, and 40% taxed as short-term capital gains using the ordinary rate. Your other short-term losses will be added to the Section 1256 short-term losses and the same would apply for your long-term losses. TurboTax will do the calculations for you.

There is a Section 1256 loss carryback election and that is why you see the screen you included in your post. If eligible, rather than use the 1256 loss in the current year, you may deduct 1256 losses on an amended prior year tax return; however, the carryback loss can only be applied against Section 1256 gains. Thus, if you don't have any 1256 gains from the prior year, then your only option is to include the loss this year and if you have any losses left over, then carry forward the loss to the next tax year.

Given your tax situation, you would leave the carryback box blank and continue through the rest of the screens.

@VAer

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VAerAuthor

Employee

@GeorgeM777 Thanks, how does carry forward work? Can the section 1256 loss be offset by future stock capital gain? I don't really trade section 1256 contract anymore.

Thanks.

M

Mike9241

there is no differentiation between 1256 loss carryover and capital loss carryover. so your entire CLCO can be used in 2022 if you have sufficient gains. if not any remaining CLCO goes to 2023