[TheOptionClub.com] 1256 Tax Treatment

 

Some clarification on 1256 tax treatment. There are some grey areas in the law regarding 1256 treatment.

All broad-based cash settled index options for sure get 1256 tax treatment. So this includes all index options, as well as any other obscure cash settled options. Broad-based means 10 or more constituents. Narrow-based (9 or less) do not qualify.

Now the grey area in the law has to do with options on ETFs that mirror indexes. So does SPY qualify for 1256 treatment? Several of the expert trader CPAs (E.G.. Robert Green of GreenTraderTax.com) take the position that options on broad-based index ETFs DO qualify for 1256 treatment. But there is no law or IRS ruling or case law directly on this point, but there are some strong arguments in favor of this position.

One of the tax matching software programs called GainsKeeper keeps an up-to-date list of ETFs that qualify for 1256 treatment of their options by their opinion. I know that SPY and UNG are on their list. The product manager told me that the IRS uses Gainskeeper on their side, so if your ETF symbol is on Gainskeeper's list you may be quite safe since the IRS will be checking that same list on their side.

Now that ThinkOrSwim has merged with Ameritrade, TOS now has Gainskeeper Gain/Loss reports on the TOS website. If GainsKeeper says "Mixed" in the holding period column, then those are the symbols that they say qualify for 1256 treatment. I know SPY and UNG, which are both broad based index ETFs, have my options trades showing "mixed" on my Gainskeeper report.

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