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 investors, traders, and hedge funds. But sadly, many taxpayers overlook essential differences in tax treatment for these groups, resulting in tax overpayments. Education is key. This chapter contains valuable information about how to treat the various instruments at tax time. We cover U.S. and international equities, U.S. futures, and other Section 1256 contracts, options, ETFs, ETNs, forex, precious metals, foreign futures, cryptocurrencies, and swap contracts.

It’s important to distinguish between securities vs. Section 1256 contracts with lower 60/40 capital gains rates vs. other financial products such as forex or swaps with ordinary income or loss treatment. Various elections are available to change tax treatment.

CAPITAL GAINS vs. ORDINARY INCOME

Most financial instruments—including equities, futures, options, ETFs, ETNs, precious metals, and cryptocurrencies held as capital assets—are subject to capital gains treatment. However, some financial products, such as U.S. futures, qualify as Section 1256 contracts with lower 60/40 capital gains rates. The distinction between typical capital gains and 60/40 capital gains treatment makes a big difference. The capital-loss limitation is a problem for traders and investors who may have trouble using large capital-loss carryovers in subsequent tax years. Forex contracts and swap contracts are subject to ordinary gain or loss treatment by default. Traders with TTS and a Section 475 MTM election have ordinary-loss treatment, which is more likely to generate tax savings or refunds sooner. 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 are securities eligible for Section 475 treatment. 

Click “Explore Tax Treatment On Financial Products” on a mobile device” 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