Tax Treatment On Financial Products

Which financial products you trade and where you trade them can make a huge difference in tax savings.

Tax treatment of financial products affects traders. But sadly, many tax preparers overlook essential differences in tax treatment for these groups, resulting in overpayments. Education is key. This chapter contains valuable information about how to treat the various instruments come tax time, including securities, Section 1256 contracts, options, ETFs, ETNs, forex, swap contracts, precious metals, cryptocurrencies, volatility products, and foreign futures.

It’s important to distinguish between securities vs. Section 1256 contracts with lower 60/40 capital gains rates vs. other types of financial products like forex or swaps with ordinary income or loss treatment. Plus, there are various elections available to change tax treatment.

Capital gains vs. ordinary income

Most financial instruments — including securities, Section 1256 contracts, options, ETFs, ETNs, indexes, precious metals, and cryptocurrencies held as capital assets — are subject to capital gains treatment. But, some of these financial products qualify as Section 1256 contracts with lower 60/40 capital gains rates. By default, forex contracts and swap contracts are subject to ordinary gain or loss treatment. The distinction between ordinary and capital gains treatment makes a big difference. The capital-loss limitation is a problem for traders and investors who may have trouble using up large capital-loss carryovers in subsequent tax years. Traders with TTS and a Section 475 MTM election have business ordinary-loss treatment, which is more likely to generate tax savings or refunds faster. Some financial products don’t qualify for a Section 475 election, including forex, cryptocurrencies, and ETNs structured as prepaid forward contracts. ETNs structured as debt instruments, however, are securities eligible for Section 475 treatment.

On a mobile device, click “Explore Tax Treatment On Financial Products” above. On a computer, see it on the upper-right. 

For more information, see Green’s Trader Tax Guide Chapter 3 Tax Treatment of Financial Products