Potential Tax Advantage with Futures – Blended Tax Rates and Capital Gains
June 29, 2016
Trading futures offers many advantages such as leverage, 24-hour trading opportunities, favorable 60/40 split on your tax liability, ease of tax filing, carry back losses, and more.
Futures and options traders have been utilizing the 60/40 method for more than 30 years. Under this tax rule, 60 cents of each dollar earned by a futures or options trader/investor is taxed at the capital gains rate while the remaining 40 cents is taxable at the ordinary rate, resulting in a blended tax rate.
In 2012, gains on securities such as stocks are taxed at either the short-term capital gains rate of up to 35% or the long-term capital gains rate of 15%. But the taxation of commodities is much different than that of securities.
Typically, if you sell an asset you have held for one year or less, any profit you make is considered a short-term capital gain. For 2012, ordinary tax rates ranged from 10 percent to 35 percent, depending on your total taxable income.
If you hold your assets for longer than a year, you can benefit from a reduced tax rate on your profits. As of 2012, the long-term capital gains tax rate was 15 percent for most taxpayers. If your ordinary tax rate is already less than 15 percent, you could qualify for a zero percent long-term capital gains rate. For high-income taxpayers, the capital gains rate could save as much as 20 percent off the ordinary income rate.
There is no accounting for each and every buy/sell throughout the year. It is important to understand that the time you hold the futures contract is not relevant to the preferential treatment of the 60/40 split. The 60/40 split is automatic to any regulated futures trade. Furthermore, the rate at which your gains are taxed is 60% long-term and 40% short-term capital gains no matter how long you actually held your trades. For example, even if you made $1,000 net profit at the end of the year on a single trade that lasted for seconds, $600 of that would be taxed at the lower long-term capital gains rate!
The 1099 received for each futures trading account, will report a net gain or loss of all trading in the specific account for that calendar year. Any open positions at year-end, are marked-to-market (MTM) and included in the net gain/loss.
If you have not traded futures yet, you may want to consider it. You may find that once you trade futures, they may become your favorite trading vehicle. Please consult your financial advisor to see if this is an option for you.
Each taxpayer’s situation is unique so please consult your tax advisor to see whether this can benefit you.
Pat Kolodziej, CPA, MST
PK Tax Services, L.L.C.
87 S. McLean Boulevard, Suite A
South Elgin, IL 60177
phone (224) 227-6061
cell (847) 858-5074
fax (224) 227-6059
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In accordance with the requirements imposed on professionals who practice before the Internal Revenue Service, we advise you that any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.