Big loss year on futures โ€” Section 1256 carryback questions

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Started by cubicle_rebel_5 · Jun 10, 2024 · 3 replies
Section 1256 tax treatment is complex. This is not tax advice - consult a CPA or tax attorney for your specific situation.
CR
cubicle_rebel_5 OP

Had a brutal year trading ES and NQ futures. Down about $180K for 2024. I know these are Section 1256 contracts which get special tax treatment.

Can I carry these losses back to previous tax years and get refunds? I made decent money in 2022 and 2023 and paid a lot in taxes. Really need that cash back right now.

OS
omar_s_7 Attorney

Important caveat on the Section 475 election: it's irrevocable without IRS consent. Once you elect it, you're locked in. And it eliminates the beneficial 60/40 treatment.

For someone with $180K in losses, MTM might make sense going forward. But understand the tradeoffs:

  • Benefit: All losses are ordinary (fully deductible against W-2 income, no $3K limit)
  • Downside: All gains are also ordinary income (taxed at ordinary rates up to 37%, not the favorable 60% long-term rate)
  • Requirement: You must qualify as a "trader in securities" - substantial, continuous trading activity. IRS looks at frequency, holding periods, intent to profit from short-term market swings.
CR
cubicle_rebel_5 OP

This is way more complicated than I thought. Going to talk to a trader tax CPA. Thanks everyone for the detailed explanations - at least I know what questions to ask now.

Main takeaway: can't carry back, stuck with the losses going forward, and need to think carefully about the 475 election.

CA
ContractNerd_A_5

I just went through an IRS audit for my small business. The auditor was actually pretty reasonable. Have your records organized, answer only what's asked, and don't volunteer extra information.