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How are options taxed when the underlying asset is a futures contract.

Futures contracts in the US have a favorable tax treatment known as the 60/40 rule, where 60% of profits are taxed at the long term capital gains rate and 40% are taxed as short term capital gains... even on daytrades.

Assuming none are ever exercised for the underlying asset, are options on futures taxed at just the short term rate? Or do they also enjoy the tax perks of the underlying asset class, or something else?

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Note that 60/40 treatment has been attacked for a few years now. Would not be shocking to see it scrapped in an eventual tax deal, somewhere down the line. Unlike carried interest, which has a solid theoretical basis, the 60-40 basis is somewhat arbitrary. The Green Book is how administrations float their wish list for taxes, and 60/40 has been a prior Green Book victim. – NL7 Apr 25 '14 at 20:02
@NL7 that's okay, the Section 1256 designation is the more relevant part of this – CQM Apr 25 '14 at 20:40
up vote 4 down vote accepted

First, the usual caveat applies: consult a tax professional with experience in these matters. That being said, the term you're looking for is a Section 1256 contract. The 60/40 rule applies to any contract that falls under this designation, which includes

  1. Regulated futures contracts

  2. Foreign currency contracts

  3. Nonequity options

  4. Dealer equity options

  5. Dealer securities futures contracts

Futures options (on commodities, indexes, etc.) would fall under the "nonequity option" category, which is

any listed option (defined later) that is not an equity option. Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index).

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perfect, this is amazing, I've spent wayyyy too much time messing with equities then! – CQM Apr 25 '14 at 19:45
My favorite part of this rule (although I don't have trader status myself) is that equity indexes don't qualify as equity options. I don't know the rationale behind it, but I'm not one to complain! – John Bensin Apr 25 '14 at 19:47
yes yes, I've been aware of the redundancies between the futures market and equities market, and this is perfect. Free margin and better taxes – CQM Apr 25 '14 at 19:48

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