Nadex 1256 Tax Treatment?

#1

Are Nadex Binaries & Bull Spreads considered 1256 Contracts for tax purposes?

#2

First a disclaimer. We do not give tax advice so seek out a tax adviser that understands futures contracts.

If you ask the tax adviser do you know how 1256 contract work and they look at you with a blank face or can’t immediately answer they are the wrong person to do your taxes.

The information may be helpful when asking your tax professional who IS familiar with 1256 tax treatment…

So with the disclaimer in place here is the following information about 1256 reporting:

Keep in mind the following when reading the below:

They are based on forex and futures not on cash indexes etc…, they are regulated by CFTC as they are a futuers exchange (like cme) and cftc oversees nfa which oversees forex

Nadex instruments are by nature short term trading instruments like forex and futures

They are not equity options even the indexes are based on index futures (based on ES not SPX)

Futures and 1256 reporting Reporting capital gains from futures trading is not quite the same as when trading stocks and options.

Capital gains from trading IRS Section 1256 contracts such as commodity futures, index futures, and index options are reported by your brokerage 1099-B (or 1099-C for tax years prior to 2006).

What is a futures contract? According to IRS publication 550 pages 50 and 51:

A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a futures date for a fixed price. If the contract is a regulated futures contract, the rules described under Section 1256 contracts marked to market apply to it. The termination of a commodity futures contract generally results in capital gain or loss.

Futures Trading

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Reporting capital gains from futures trading is not quite the same as when trading stocks and options.

Capital gains from trading IRS Section 1256 contracts such as commodity futures, index futures, and index options are reported by your brokerage 1099-B (or 1099-C for tax years prior to 2006).

What is a futures contract? According to IRS publication 550 pages 50 and 51:

A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a futures date for a fixed price. If the contract is a regulated futures contract, the rules described under Section 1256 contracts marked to market apply to it. The termination of a commodity futures contract generally results in capital gain or loss. What is a Section 1256 Contract? According to IRS publication 550 page 39:

A Section 1256 contract is any:

  1. Regulated futures contract

  2. Foreign currency contract

  3. Non-equity option And on page 40 under the Non-equity option heading:

Non-equity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based upon the value of a group of diversified stocks or securities (such as the Standard and Poor’s 500 index).

Good news for active traders: The good news for traders of Section 1256 contracts is threefold:

60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. What this means is a more favorable tax treatment of 60% of your gains. A special loss carry-back election is allowed. Section 1256 contract net losses can be carried back 3 years instead of being carried forward to the following year. These losses can only be carried back to a year in which there is a net Section 1256 contracts gain, and only to the extent of such gain, and cannot increase or produce a net operating loss for the year. The loss is carried back to the earliest carry-back year first and any unabsorbed loss can then be carried to each of the next two years. So if you have a net loss for the year, you can amend a previous year’s tax return and possibly get a refund! Your broker marks all of your open positions to market and reports the total gain or loss on a 1099. The gain or loss and the 60/40 split from these contracts are reported on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles).

Part I, Line 2 of this form simply asks for your broker-provided 1099 total gain or loss, and then it splits this loss as 40% short-term on Line 8, and 60% long-term on Line 9. These entries then flow to your Schedule D - Part I, Line 4 for short-term capital gains and Part II, Line 11 for long-term capital gains.

No additional detail or complex matched trade report (as required for capital gains from stock, options, and single-stock-futures) is required.

#3

I am new to Nadex trading, but I have used Turbo Tax Premium for years for tax return preparation because it can import transactions electronically from all my brokers into my tax return. Does Nadex participate in this or other services? Are there any other recommendations for keeping records for the tax purposes? I figure I might as well start well knowing there will be many transactions.

#4

Unlike stocks you don’t have the transaction history to worry about, it is a simple field you enter it. You just need the 1099-B as it is 1256. I will have a tax webinar soon with someone who has the ability to advise on the subject.

#5

Thank you Darrell. This is yet another reason to trade Nadex! The guest webinar is an excellent idea.

#6

SOoooooo… Whats the “answer”… YES … OR … NO ???

#7

I don’t give tax advice please re-read the answer

#8

HI Darrell I was looking for a way to import my nadex trades into turbo tax. I am sure that you have some method to get that info into turbo tax besides listing each trade manually.

#9

Thank you for getting me on the right thread. I see you have explained the proper tax procedure in great detail.

#10

Just some food for thought I have been doing a little research with tax time soon approaching and have found out that NADEX contracts are considered “swaps” as of 7/2013. The IRS does not define a “swap” as a 1256 contract. From IRS publication 550 (2013) Exceptions. A section 1256 contract does not include: Interest rate swaps,

Currency swaps,

Basis swaps,

Interest rate caps,

Interest rate floors,

Commodity swaps,

Equity swaps,

Equity index swaps,

Credit default swaps, or

Similar agreements.

For more details, including definitions of these terms, see section 1256. If anyone has different information, it would be appreciated.

#11

That is accurate and CFTC decided to put spreads/binaries at swaps - so that is a fun new one… One place i know that is familiar with nadex binaries/spreads and traders taxes: GREEN TRADER TAX http://www.greencompany.com/

#12

Green doesn’t know about their loss deduction status if that’s what you want to know.

Some months ago NADEX told me that their instruments are considered by the CFTC to be “commodity options” categorized as “swaps.”

#13

I am working with Green on getting it resolved and hopefully doing a webinar for us soon :slight_smile:

#14

Well it is certainly confusing, as “commodity options” are eligible for 1256 tax treatment using form 6781, but “swaps” are not. Hopefully we’ll get some resolution before the 15th, if not I can always file an extension. Personally I did not make enough enough money in 2013 to justify hiring a tax attorney or CPA, but this year is shaping up to be different.

#15

Pursuant to Section 5c©(1) of the Commodity Exchange Act, as amended (“Act”), and section §40.6(a) of the regulations promulgated by the Commodity Futures Trading Commission (the “Commission”) under the Act (the “Regulations”), North American Derivatives Exchange, Inc. (“Nadex”, the “Exchange”) hereby submits to the Commission a series of amendments to its rules in connection with a transition in the characterization of its Contracts from the futures regime to the swaps regime.

#16

It seems so, but I think the term “commodity option” is only a description, not a category as is “swap.”

IMHO binary options aren’t options.

“A commodity swap is an agreement whereby a floating (or market or spot) price based on an underlying commodity is traded for a fixed price over a specified period.” IMHO this is a more accurate description of a (NADEX) binary option.

#17

As stated DM is working w Green on getting clarity so a presentation can be made by Green. It was clear and the case for commodity option was one that could be made until the cftc changed the classification recently do to Dodd frank.

#18

I would tend to agree, thanks for your input!

#19

I also found this:

Noncapital Assets

Commodities derivative financial instrument. A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code).

Publication 544 (2013), Sales and Other Dispositions of Assets http://www.irs.gov/publications/p544/ch02.html#en_US_2013_publink100072479

It seems that makes it ordinary income(loss)? And the $3,000 loss limit doesn’t apply to ordinary loss, does it?

#20

No one here can answer this you have to go to a cpa that is familar with investing and day trading tax code. Anything here will be a guess unless we have a resident CPA who will take on the liability via a forum to post it.