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Tax treatment of futures trading

 
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GunterK



Joined: 28 Nov 2005
Posts: 10
Location: Los Angeles area

PostPosted: Fri Dec 02, 2005 12:26 pm    Post subject: Tax treatment of futures trading Reply with quote

If you started trading this year, you may not be familiar with the way taxes are calculated for futures trading (many tax prepares are not familiar with it either)

You need to know the following:

Gains and losses in futures trading are "market to market" at the end of the year. This means, the unrealized profits/losses of open positions (at the closing of the last trading day of the year) must be included in your profit/loss calculations for the year.

This means, there is no point in year-end position liquidation, for the purpose of massaging your tax liability.

All profits and losses from futures trading are considered 60% long term and 40% short term, no matter how long you held a position, be it daytrades or position trades.

All this may sound complicated, but the procedure of preparing this portion of your taxes is very simple... and you don't have to add up all the trades yourself. (it takes me less than 5 minutes to fill out the forms involved in these calculations).

a) wait for your brokeage firm to send you a 1099 form (it should arrive in January or early February). This form presents a summary of all your trades for the year, and includes the "marked to market" positions. Your brokerage firm submitted a copy of this form to the IRS. If you submit different numbers in your tax return, you are asking for an audit. (In the VERY rare case of this 1099 form being in error, contact your brokerage firm.)

If your brokerage firm was bought by another firm during the year (such as Man Financial acquiring Refco LLC this November), you will receive two 1099 forms, one from each firm.

b) take the profit/loss shown on the 1099 form(s) and enter the data into IRS form 6781. In the tabulation where you are asked to itemize your trades, just write "numerous transactions with XYZ brokerage, account xxx" and enter the end result.

As you continue on this form, it will guide you into splitting your profit/loss into 60% long term and 40% short term.

c) transfer the data from form 6781 to Sched. D. You will see a line that says "from form... 6781...". Sched D will combine your 6781 data with other gains or losses you might have.

d) from Sched D, the data goes to form 1040. Remember, loss deductions are limited to 3k per year. Losses in excess of this amount will transferred to the next year.

PS, I am not a tax professional and cannot accept liability for any problems that might arise from the above. Please consult with your tax preparer. However, I have used the above procedure for years, without any objections from the IRS.

Gunter K
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PostPosted: Fri Dec 02, 2005 1:50 pm    Post subject: Reply with quote

No wash sale rule for futures either. :)

Also note, none of this applies to single stock futures. Those are taxed like stocks.
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GunterK



Joined: 28 Nov 2005
Posts: 10
Location: Los Angeles area

PostPosted: Fri Dec 02, 2005 7:15 pm    Post subject: Reply with quote

Thanks, biker, for the valuable addendum
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DJ



Joined: 21 May 2005
Posts: 11
Location: Dallas, TX

PostPosted: Sun Dec 04, 2005 1:38 pm    Post subject: Tax tips . . . Reply with quote

Thanks Gunter - Great info.

DJ
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Annie1422



Joined: 18 Jan 2007
Posts: 5
Location: United States

PostPosted: Mon Feb 05, 2007 2:21 pm    Post subject: thanks! Reply with quote

Thank you for your post! This was very helpful information for me!

Teri
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