Tax reporting of 1256 contracts on Form 6781

[indiana*josh 59]

Background:  My understanding is that some index options we trade (RUT and VIX, for example) are considered Section 1256 contracts because they are based on a broad index, not a specific equity.  Gains and losses related to Section 1256 contracts are reported to the IRS using Form 6781 (and the totals from this form transfer to 1040 Schedule D).

 

Interactive Brokers provides a handy "Gain/Loss Worksheet for 1256 Contracts" which appears to include the necessary information to complete Part I ("Section 1256 Contracts Marked to Market") of Form 6781.

 

Here is my question:  Does anyone here enter anything in Parts II or III of Form 6781 based on the RUT, VIX, or similar trades made with SO?  My interpretation is that Part II ("Gains and Losses from Straddles") is using a different definition of the word "straddle" than what we refer to as an option straddle, so I don't think I need to put anything there based on the instructions.  I'm less sure about whether anything should go in Part III.  It says it's a memo entry only, so it doesn't affect the tax calculation.  Part III is called "Unrecognized Gains from Positions Held on Last Day of Tax Year", but I don't know why this tracking would be necessary if everything is being marked to market as of the end of the tax year.

 

Requisite Disclaimers:  I'm just curious what other people are doing.  Nothing you say will be construed as tax or legal advice.  Nor should anything I said above be so construed.  I'm not an accountant or a lawyer.  Everyone's tax situation is different, but there may be some similarities related to the SO strategies that we are all using.

 

Thanks!

Josh

[Yowster 8,208]

I import all of my trades from IB into Gainskeeper and then use it to generate my tax forms which I import into TurboTax.  All of the VIX and RUT option trades were considered 1256 contracts.  On the 6781 form only section II was filled in (my tax status is not "mark to market" and I didn't have any VIX/RUT trades active at the end of the year, so sections I and III were blank).   In section II, the net result of all my RUT & VIX trades were summarized (a separate statement was generated and had the trades broken down).

[jfouche 12]

The purpose of the other areas of the form is to stop you from creating virtual losses and offsetting them against real gains. It used to be a trick that market makers did - buy a delta hedged position on a super volatile stock, so in a short time you have a big loss on one leg. Then roll the losing leg to another expiration and you have loss for tax purposes. It shouldn't happen in SO trades as we don't play games like that. For more see section 1092 of the tax code.

[SeanM 29]

All of the VIX and RUT option trades were considered 1256 contracts.  On the 6781 form only section II was filled in (my tax status is not "mark to market" and I didn't have any VIX/RUT trades active at the end of the year, so sections I and III were blank).   In section II, the net result of all my RUT & VIX trades were summarized (a separate statement was generated and had the trades broken down).

 

Thanks for the helpful info, guys.  

 

Yowster: I do have a few clarification questions regarding your post.  The Section II you are referring to is "Gains and Losses from Straddles"?  So, are you saying that Gainskeeper is classifying all of your VIX and RUT positions as straddles?  And, are your VIX and RUT trades completely omitted from your F8949?  

 

Maybe some color on my situation would clarify the questions I have.  I imported two .txf files into TurboTax; one from IB and one from TradeKing.  The TK .txf file included all my RUT trades in the 8949, but the IB file did not.  Rather, as I'm sure you know from your experience, IB provides a separate G/L from 1256 contracts.  However, no F6781 was generated from the IB .txf import, either.  I thought I was probably supposed to enter the 1256 contract totals in Section I of F6781 regardless of whether or not I have MtM tax status (I don't) but, based on your answer, Yowster, I have spiraled into complete confusion.

 

Any additional insight from you guys would be immensely appreciated.  

 

Sean

[indiana*josh 59]

My understanding is that 1256 contracts receive the marked-to-market 60/40 split treatment for everyone.  This is a separate issue from whether a particular individual is considered a trader who has elected MtM status for tax purposes.  Refer to page 26 of this CBOE pamphlet, this Investopedia article, and IRS Publication 550.  Does anyone have a different understanding?

 

That's what led me to the conclusion that all my RUT and VIX trades should go under Part I of Form 6781, but I'm still unsure about Parts II and III.

[SeanM 29]

My understanding is that 1256 contracts receive the marked-to-market 60/40 split treatment for everyone.  This is a separate issue from whether a particular individual is considered a trader who has elected MtM status for tax purposes.  Refer to page 26 of this CBOE pamphlet, this Investopedia article, and IRS Publication 550.  Does anyone have a different understanding?

 

That's what led me to the conclusion that all my RUT and VIX trades should go under Part I of Form 6781, but I'm still unsure about Parts II and III.

 

That's what I thought, too, until Yowster's comment suggested otherwise.

[jfouche 12]

I don't think you can get 60-40 tax treatment on 1256 gains after electing section 475. Once you have done that, I believe all trading goes to form 4797 and flows into 1040.

[Yowster 8,208]

Thanks for the helpful info, guys.  

 

Yowster: I do have a few clarification questions regarding your post.  The Section II you are referring to is "Gains and Losses from Straddles"?  So, are you saying that Gainskeeper is classifying all of your VIX and RUT positions as straddles?  And, are your VIX and RUT trades completely omitted from your F8949?  

 

Maybe some color on my situation would clarify the questions I have.  I imported two .txf files into TurboTax; one from IB and one from TradeKing.  The TK .txf file included all my RUT trades in the 8949, but the IB file did not.  Rather, as I'm sure you know from your experience, IB provides a separate G/L from 1256 contracts.  However, no F6781 was generated from the IB .txf import, either.  I thought I was probably supposed to enter the 1256 contract totals in Section I of F6781 regardless of whether or not I have MtM tax status (I don't) but, based on your answer, Yowster, I have spiraled into complete confusion.

 

Any additional insight from you guys would be immensely appreciated.  

 

Sean

 

To answer your questions:

• My VIX and RUT trades are totally omitted from form 8949.
• When I imported the data into TurboTax from Gainskeeper (Gainskeeper had my IB trades downloaded) and answered some of the TurboTax questions, my form 6781 had the VIX and RUT totals in section 2.  I guess this means that Gainskeeper treated them as straddles (I believe the IRS classification of a straddle is different/wider than a purely options trading definition of a straddle).  But maybe it was the way I answered the TurboTax questions related to the 1256 trades that resulted in my 6781 getting filled out the way it was???
• Regarding Form 6781 section I or II - I don't think it really matters what section you record your trades because the totals both wind up getting mapped to the same Schedule D line items.  So, as long as your gain/loss totals are accurate I think you'll be fine either way. 

Edited April 8, 2014 by Yowster

[indiana*josh 59]

Thanks for all the replies so far.  One other related question:  Are you actually itemizing each trade on form 6781, or just putting the totals?  And if the latter, are you including IB's 1256 gain/loss worksheet as an attachment to your return?

 

I'm using Tax Act Online and cannot figure out how to bulk upload transacations for form 6781 (even though it let me do so for my form 8949 transaction), nor can I figure out how to include IB's worksheet as an attachment.  Does TurboTax make any of this any easier?  It's a lot more expensive, but maybe I should switch to that product instead.  (I may just do a paper return - I'm not sure all this complicated tax software is really making my life easier.)

 

I appreciate any responses on what others are doing.  I think many of us who follow SO are in this same boat, so let's help each other!

[bam1960 53]

Indiana

 

I am in the process of working thru it on turbo tax so far it has been easy enough but i am just getting started on IB all other broker accounts downloaded easily into the software but will try to do IB tonite and will let you know how it goes. I also own a small farming operation and as far as that went it simplified the process to where even a dumby like me breezed thru it. Up to this year had used a CPA but got tired of paying fees.

 

Bret

[Yowster 8,208]

in my case of importing my data from Gainskeeper into TurboTax and answering some questions about the 1256 data, TurboTax put the totals in the 6781 and generated a separate statement with the detailed trade data.  Overall, the combination of Gainskeeper (with IB trade data imported into it) and TurboTax works pretty well for me - despite having a ton of trades I was able to do all my taxes in one afternoon.  Here are a few notes on things that require a little extra work in this scenario:

• IB does not always summarize multi-contract options trades when generating the import for Gainskeeper, so a lot of individual contracts are listed as their own transactions.  This results in a lot of "wash sales" entries as well as having to purchases a larger number of trades package from Gainskeeper.  However, the savings on commission at IB compared to other brokers makes this just a minor nuisance.
• For short legs of options that expired worthless, TurboTax prompted me to enter cost basis data (of zero) for each of these trades.
• Be careful on state returns, when TurboTax imported my trade data into my Pennsylvania return my gain showed up as a large loss.  After a little digging, I saw that Pennsylvania has different wash sales rules so it ignored all the wash sales data.  I entered an off-setting entry so that my gain showed up properly.

[bam1960 53]

Indiana

 

I finished my returns but as far as being correct I assume so but I just downloaded into1256 G/L into turbo tax and it accepted but Im not a tax expert

 

Just thought you might be interested 

 

Bret

[indiana*josh 59]

Thanks, Bret.  What I ended up doing was putting my total gain/loss on form 6781.  I was using Tax Act and could not figure out a way to import my 100+ individual transactions, nor could I get it to accept an attachment (even though it will take attachments for Form 8949 for regular stock/option transactions).  So, even though the IRS instructions say to list every individual 1256 transaction if they are not reported by your broker (which they aren't), I did not include the detailed info in my return.  I guess they'll ask for it if they want it, and hopefully I'm too small to be worth the IRS' time.

 

Just out of curiosity, where did Turbotax ultimately put all that information on the PDF of your return?  Are all individual 1256 transactions listed on form 6781, or did it create some sort of supporting schedule?

 

Thanks,

Josh

[Yowster 8,208]

TurboTax put the individual 1256 data on a page called "additional information".  Its not an official tax form or worksheet.  It just referenced forms 6781 and 1256, and it listed all of the individual trades.   I also heard a story on the news that the chances of audit are now the lowest they have ever been due to the fact that the IRS employs fewer auditors than in years past.

[bam1960 53]

Like yowster said i wouldnt worry to much about audits and I didnt attach documents to my return. Also as a side note for 56.00 you can get audit coverage on turbo tax which seems to me like a cheap alternative to a tax lawyer. For that fee they will deal with IRS if you do get audited. But personally I wouldnt worry about it.

 

Bret