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In a recent op-ed, Warren Buffett made a claim about investment managers:

Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

Now I thought capital gains required you to hold for a year and a day. What trick is Buffett referring to here?

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A Section 1256 contract is any:

  1. Regulated futures contract
  2. Foreign currency contract
  3. 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.

https://www.tradelogsoftware.com/resources/filing-taxes/futures/

It's a really weird rule (arbitrary 60% designation, so broad, etc), but section 1256 contracts get preferential tax treatment and that's what Buffett's talking about.

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    A fine example of the corruption sprinkled throughout our tax code.
    – mgkrebbs
    Commented Aug 15, 2011 at 16:25
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    what worries me is that I don't understand any of this.
    – jokoon
    Commented Aug 15, 2011 at 18:11
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    This kind of treatment actually makes sense with regard to index funds, since they generally only sell-off a security when the holdings of the index are altered, and in that situation, the holding has been in the index usually for more than a year. However I agree that on Options and Futures, I just don't see a reason to treat any gains as long term unless the length of the option or contract itself is more than a year.
    – Chuck van der Linden
    Commented Aug 15, 2011 at 18:16
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    Even though the holding has been in the index, the purchaser of the contract has not necessarily held on for that long. I don't see why an investor should be rewarded with long-term gain treatment when the period of holding could be very short.
    – BlackJack
    Commented Aug 15, 2011 at 18:42
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    Just to clarify, the "futures" market is a different market than the "stock" market. Futures were originally made for people that produced products like fruits, oil, cattle (helps them not lose money in their transactions in a physical market), stocks were made for people that wanted to raise and make money. Gov't wanted to help producers in the futures market with a tax break, incentive to bring more production to America. Wall St made it possible to trade stocks in the futures market (and then "stock futures" in the stock market, lol...) . Wall St produces nothing and gets same tax break.
    – CQM
    Commented Mar 22, 2012 at 17:38

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