What’s the difference?

Section 1256 contracts are any kind of futures contract currency, financial, agriculture, etc. Traders use Form 6781 to report Section 1256 gains and losses. The tax rate on these contracts is a “blend” 60 percent of the gains are taxed at the long-term capital gains tax rate and 40 percent at the short term capital gains tax rate, regardless of how long a position is held.

This 60/40 split gives commodities traders an advantage over securities traders. While the long-term rate is capped at 15 percent, the short-term (or “ordinary”) rate goes as high as 35 percent. The maximum blended 60/40 rate is 23 percent, 12 percent less than the 35 percent maximum rate paid by forex traders by traders.

However, forex traders aren’t necessarily stuck with the higher tax rates. They have the opportunity to “elect out” of IRC Section 988.