A Section 1256 contract is any:
- Regulated futures contract
- Foreign currency contract
- Non-equity option
Non-equity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based upon the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index).
60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. What this means is a more favorable tax treatment of 60% of your gains.
It's a really wierd rule (arbitraty 60% designation, so broad, etc), but section 1256 contracts get preferential tax treatment and that's what Buffett's talking about.