Form 6781

Form 6781: Gains and Losses From Section 1256 Contracts and Straddles

Form 6781 is the IRS form used to report gains and losses from Section 1256 contracts and from options straddles that are subject to mark-to-market rules. Traders in futures, certain options, and other regulated contracts use this form to calculate and report taxable gain or loss each year.

What counts as a Section 1256 contract?

Section 1256 contracts generally include:
* Regulated futures contracts
* Certain foreign currency contracts
* Options (including dealer equity options)
* Dealer securities futures contracts

For tax purposes, these contracts are treated as if they were sold at fair market value on the last business day of the tax year (mark-to-market), even if the position is still open.

What is an options straddle?

A straddle is a position composed of offsetting contracts (for example, buying a call and a put on the same underlying with the same strike and expiration). Straddles can offset risk between positions and have special reporting rules on Form 6781.

Mark-to-market and the 60/40 rule

Gains and losses from Section 1256 contracts are divided 60% long-term and 40% short-term regardless of how long the position was actually held. This “60/40” treatment often yields more favorable tax rates than treating all gains as short-term ordinary income.

Who must file Form 6781?

Individual taxpayers and traders who held Section 1256 contracts or reported straddles during the tax year must use Form 6781 to report those gains and losses. This includes certain foreign contracts traded on foreign exchanges that the IRS treats as Section 1256 contracts.

How to complete Form 6781 (overview)

• Part I — Report gains and losses from Section 1256 contracts. Use either the actual sale price or the mark-to-market value as of December 31.
• Part II — Report straddle-related amounts: losses in Section A and gains in Section B.
• Part III — Used for certain unrecognized gains on positions held at year-end; complete if applicable.

Follow the form instructions carefully for netting and carrying forward any losses. Hedging transactions and some special situations have different rules; consult the Form 6781 instructions or a tax professional.

Example

A trader buys a regulated futures contract for $25,000. On December 31 its market value is $29,000, so the trader recognizes a $4,000 mark-to-market gain on that tax year’s return (60% long-term, 40% short-term). If the contract is later sold for $28,000, the trader recognizes a $1,000 loss in the year of sale (28,000 − 29,000), reported with the same 60/40 split.

Why this matters

Because Section 1256 gains receive 60% long-term capital gain treatment, traders may pay lower tax rates on a greater share of their gains compared with ordinary short-term treatment. Proper reporting on Form 6781 ensures compliance and accurate tax calculation.

Key takeaways

• Use Form 6781 to report Section 1256 contracts and straddles subject to mark-to-market rules.
• Section 1256 contracts are treated as sold at year-end and taxed 60% long-term / 40% short-term.
• Straddles have separate reporting sections on the form.
• Download Form 6781 and its instructions from the IRS website and consult guidance for hedging and special cases.

Sources
* IRS — Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
* 26 U.S.C. § 1256 (Section 1256 contracts marked to market)