60/40 Tax Rule

Definition

The 60/40 tax rule under IRS Section 1256 provides that gains and losses on regulated futures contracts are treated as 60% long-term and 40% short-term capital gains, regardless of the actual holding period. This blended rate can result in a significantly lower tax burden compared to short-term stock trading gains, which are taxed entirely as ordinary income. It is a major tax advantage for futures traders.