Trade Futures or S&P 500 Index Options? The IRS Treats 60% of Your Gains as Long-Term, Even on a Day Trade

A single tax code section can legally shift most of a day trader's short-term gains into a lower tax bracket, and the IRS baked it in decades ago for futures and certain index options. The catch is knowing exactly which…

A day trader buys options on the S&P 500 index at the opening bell and sells them before lunch at a profit. If those were shares of stock, the whole gain would be short-term and taxed like ordinary income. Because they’re broad-based index options, 60% of that gain is treated as long-term.

The rule comes from Section 1256 of the Internal Revenue Code. It gives traders in futures and broad-based index options a blended tax treatment, even on a day trade (a position opened and closed in the same session). The other 40% is short-term. Here’s how the rule works, which contracts qualify, and where it trips people up.

Normally you must hold an asset for more than a year for a gain to qualify as long-term. Gains on assets held a year or less get taxed at ordinary income rates. Those held longer qualify for lower preferential rates. Section 1256 ignores the holding period entirely. Under 26 U.S.C. § 1256(a)(3), gain or loss on a section 1256 contract is split, with 40% treated as short-term and 60% as long-term.

IRS Publication 550, Investment Income and Expenses (the TY2025 edition), calls this the “60/40 rule” in its “Section 1256 Contracts Marked to Market” discussion. It says the split is “true regardless of how long you actually held the property.” The same-day trade is covered because § 1256(c)(1) applies the rule to positions closed during the year by offsetting, exercise, lapse or any other means.

Publication 550 lists five kinds of section 1256 contracts: regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options and dealer securities futures contracts. For most individual traders, the first and third are the ones that matter.

Contracts that look alike can still be classified differently. Publication 550 notes that cash-settled index options count as nonequity options only if the SEC determines the index is broad based. The exchange matters too. In Rev. Rul. 2026-16, the IRS ruled that ICE Endex qualifies as an exchange for this purpose for contracts entered into on or after September 1, 2026. Check how your specific contract is classified before you count on the split.

Under § 1256(a)(1), any section 1256 contract you still hold at year-end is “marked to market,” meaning it’s taxed as if you sold it on the last business day of the year at its then-current price. You can owe tax on a gain you never cashed in.

Publication 550 gives an example. A futures contract bought for $50,000 is worth $57,000 at year-end, so the owner reports a $7,000 gain, split 60/40. If the owner sells it the next year for $56,000, that year’s return shows a $1,000 loss, also split 60/40.

Losses split the same way. A loss that’s mostly long-term may help less if the rest of your gains for the year are short-term.

One rule works in traders’ favor. Normally, a loss is blocked when you buy back substantially identical securities around the time you sell, but that wash sale rule doesn’t apply here. Under § 1256(f)(5), it doesn’t apply to losses created by year-end marking.

Mixed straddles (offsetting positions where some, but not all, are section 1256 contracts) have their own rules. Section 1256(d) lets you opt out of the mark-to-market rule for them, but each position has to be identified by the close of the day you buy the first section 1256 contract. Once made, the election can’t be revoked without IRS consent. Section 1256 gains and losses go on Part I of Form 6781, per Publication 550.