I am considering tax optimization strategies. So far I have filed SPX, QQQ, IWM options under 1099-B. I read section 1256 can be used to reduce the tax, i.e., 60/40 long term CG/ short-term CG.
Has anyone used it, and did you receive any feedback from IRS? 
Appreciate your help in advance.
Sorry, I donāt do options so Iām not familiar with this section of the tax code. I would recommend you consult a professional who works with options traders.
AJ
Iāve use ābroad-basedā options on indexes. SPX (the S&P500 index) and RUT (the Russell 2000 index). Using Interactive Brokers, the transactions appeared in my tax forms as Section 1256 entries, which fed into Form 6781. I used Turbo Tax.
IWM, QQQ are not broad-based (index) options, since they are ETFs, and options on them are not treated as 1256 contracts. So normal (not Section 1256) reporting. SPY would be treated the same.
Iām sure there are lots of ways to search for this. I just googled āturbo tax broad-based options 1256ā and got an AI/gemini summary, with links below.
Note that for Section 1256 contracts (futures or these index options), gains/losses are āmarked to marketā. So if you hold them across calendar years, you will need to report gains/losses for what you hold. If feels like youāre paying taxes on āunrealized gains/lossesā, but with these contracts you realize your gains/losses every day (mark-to-market).
Hope that helps.
Thanks. I have seen E*Trade reports SPY, IWM, QQQ as 1256 contracts. However, IBKR is reporting them as part of 1099ā¦ I want to use 1256, as I could reduce my Short-term CG. Unfortunately bulk of my trades are in IBKR! I have in the past re-classified few trades, but not lots of tradesā¦
Interesting. This wikipedia entry, 1256 Contract - Wikipedia , points to an IRS notice that says brokers get to determine if the SPY, etc. options fall into the 1256 world or not, based on which regulator (SEC of CFTC) has jurisdiction. Seems less clear than I thought!
I think you have to āmark to marketā all 1256 trades each year. That can really mess up trading through year end periods. For example, if you own a Jan future contract in December, on Dec 31st, you must mark it as sold, declare any gain or loss for that year, reset your basis for Jan 1, and then allow the trade to continue into the new year.
Yes, I am aware of that. I do that for $SLV, $GLD trades. I can handle that. Also, few positions I carry beyond the year-end, remember these are options, so there is no long-term capital gains advantage.
Thanks I didnāt get the nuance earlier. I just noticed different brokers treat differently.
I have generally traded SPY, QQQ, IWM until now. After doing some minor research, I think I am going to try SPX, just for the tax treatment. Even though I am very comfortable with options, risk management, and have sufficient capital, still index options are new to me. So will experiment with 1 or 2 contracts for few months.
Oddly enough, my first options trades were in index options. In the mid-80s, I began trading NYA options (NYA was a common index back then) and I did well enough through 85, 86, and got too confident in 87. I was very long NYA index options in autumn of 1987 and my entire options portfolio got decimated in the days leading up to Black Monday and wiped out on Black Monday. Luckily that was before I was investing any āreal moneyā*. I then stopped trading options for a few years. Heck, I became disillusioned with all the markets for a while, and invested mostly in fixed income. CMOs (Collateralized Mortgage Obligations) were very popular at the time and yielded about 8-8.5% so I bought those with my money instead. Little did I realize that when rates dropped, most of those would be prepaid and I would get my money back too quickly and have to find new places for it ā¦ at substantially lower rates. Leaving the equity markets was HUGE mistake I made in those early years.
* Every penny that I ever had, and every penny that I have today, was solely derived from earned income. And in the mid-80s, I had only worked for a few years and thus had little saved at that time.
