60/40 Tax Rule
The 60/40 tax rule is the IRS provision under Section 1256 of the Internal Revenue Code that taxes gains and losses from qualifying contracts (such as regulated futures and broad-based index options) as 60% long-term capital gain or loss and 40% short-term capital gain or loss, regardless of the actual holding period. This blended treatment results in a lower effective tax rate on short-term gains compared to standard short-term capital gains rates.
The 60/40 tax rule is the defining characteristic of the Section 1256 contract tax regime. It was enacted to provide a straightforward blended tax rate for instruments that are often held for very short periods — sometimes just minutes or hours — in markets where the distinction between short-term and long-term holding periods would be impractical to apply on a trade-by-trade basis.
For a taxpayer subject to the top ordinary income rate of 37% and the top long-term capital gains rate of 20% in 2025, the blended maximum federal rate on Section 1256 gains is computed as: (60% x 20%) + (40% x 37%) = 12% + 14.8% = 26.8%. Adding the 3.8% NIIT on the full amount brings the effective maximum to approximately 30.6%. This compares favorably to the 40.8% maximum rate (37% + 3.8% NIIT) that would apply to short-term gains from equity options or futures not subject to Section 1256.
For taxpayers in lower brackets, the benefit of the 60/40 rule is smaller but still present. A taxpayer in the 22% bracket pays 22% on short-term gains and 15% on long-term gains; the 60/40 blended rate on Section 1256 income is (60% x 15%) + (40% x 22%) = 9% + 8.8% = 17.8%.
The 60/40 rule applies to the net gain or loss from all Section 1256 contracts for the year after the mandatory mark-to-market calculation. The net amount is transferred to Schedule D, where it combines with other capital gains and losses. Brokerage statements for accounts that trade these instruments will typically identify the total Section 1256 gain or loss and provide the pre-calculated 60/40 split for tax reporting purposes.
For active traders who use broad-based index options (SPX, RUT, NDX, VIX, and similar cash-settled index products) rather than single-stock options or ETF options, the 60/40 rule is a significant structural tax advantage. Many traders prefer S&P 500 index options over SPY ETF options in part because of this favorable tax treatment.
Section 1256 losses are also eligible for a three-year carryback, which is unique among capital loss rules. This allows a trader with a large loss year to potentially recover taxes paid in prior years when Section 1256 gains were recognized.