US Trading Taxes: Capital Gains, Section 1256, Mark-to-Market

In the US, two traders with identical profit can pay wildly different tax simply because of what they traded and how they elected to be taxed.

The US tax code routes trading income through several parallel systems. Knowing which one applies to you is the first step to keeping more of your gains.

Capital gains: short-term vs long-term

For stocks, ETFs, and most securities held in a standard brokerage account:

Holding period	Tax rate
≤ 1 year (short-term)	Ordinary income rate (up to 37%)
> 1 year (long-term)	0% / 15% / 20% (preferential)

Short-term rates punish active traders. A day trader flipping stocks pays ordinary income rates on every realized gain.

Section 1256: the futures trader's advantage

Regulated futures contracts, options on futures, and broad-based index options are taxed under Section 1256:

60/40 treatment: 60% of gains are taxed at long-term rates, 40% at short-term — regardless of holding period.
Mark-to-market: all open 1256 positions are priced to market on December 31, realizing gains or losses for that tax year.

This is a meaningful benefit: an index futures day trader gets blended long-term treatment that a stock day trader never receives.

Mark-to-market election: IRC 475(f)

Traders who qualify for trader tax status (TTS) may elect mark-to-market accounting under IRC Section 475(f):

All securities are marked to market at year-end (gains/losses realized).
Trading gains become ordinary income/loss (not capital).
No wash sale rule applies to MTM securities.
Losses can offset other income, and excess becomes an NOL deduction.

The election is due by April 15 of the current tax year (for that year). It is powerful but complex — and generally benefits consistent losers or very high-volume traders.

The wash sale rule

If you sell a security at a loss and repurchase a "substantially identical" security within 30 days before or after, the loss is disallowed and added to the new position's cost basis. Day traders generate wash sales constantly; they must be tracked carefully.

Filing path

Reconcile broker Form 1099-B against your own records
Report each sale on Form 8949
Summarize on Schedule D
For 1256 contracts, use Form 6781
For 475(f) MTM, file Form 4797

Bottom line

US tax law rewards futures traders and long-term holders, and punishes frequent stock traders. Understanding the regime before you choose your instruments is part of strategy design — not a detail to fix in April.

Next: see how the UK takes the opposite approach, rewarding spread bettors with zero capital gains tax.