SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Being cash settled has nothing to do with 60/40 treatment. The 2000 Commodity Futures Modernization Act provided 60/40 treatment for certain commodity regulated products, regardless of time held. Section 1256 of the IRS code further delineates those products which are eligible. While broad based indexes are included, I believe that only those broad based indexes regulated as futures (and options on the same) are eligible - therefore SP but not SPX. SPX is regulated as a security.
Guess I should have looked that up before posting. I remembered reading something to the contrary a couple of years ago, but a quick google search certainly agrees with you.
Looks like Traders Accounting is pushing for the same treatment on the ETF's, as well. Seems to be a grey area, which to me is always worth pushing when it comes to taxes. :eek:
Looks like Traders Accounting is pushing for the same treatment on the ETF's, as well. Seems to be a grey area, which to me is always worth pushing when it comes to taxes. :eek:
From the IRS web site:
Section 1256 Contract is Any:
Regulated futures contract,
Foreign currency contract as defined in chapter 4 under Section 1256 Contracts Marked to Market,
Nonequity option,
Dealer equity option, or
Dealer securities futures contract.
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So what is a Nonequity option?
Any listed option that is not an equity option, such as debt options, commodity futures options, currency options, and broad-based stock index options.
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What is an equity option?
Any option:
To buy or sell stock, or
That is valued directly or indirectly by reference to any stock or narrow-based security index.
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Don't you just love taxes?
Section 1256 Contract is Any:
Regulated futures contract,
Foreign currency contract as defined in chapter 4 under Section 1256 Contracts Marked to Market,
Nonequity option,
Dealer equity option, or
Dealer securities futures contract.
-----------------------------------------------------
So what is a Nonequity option?
Any listed option that is not an equity option, such as debt options, commodity futures options, currency options, and broad-based stock index options.
----------------------------------------------------
What is an equity option?
Any option:
To buy or sell stock, or
That is valued directly or indirectly by reference to any stock or narrow-based security index.
-----------------------------------------------------
Don't you just love taxes?
Rather than argue the point I will refer you to an article from Green Trader Tax. Taders Accounting (as well as pretty much every other trader tax professional I've ever talked to) agrees.
Under the CFMA almost all indices are now âbroad basedâ commodities
The main effect of the CFMA was to significantly expand the definition of a âbroad basedâ index, which is considered a commodity. âNarrow basedâ indices are considered securities.
Among assorted rules under the CFMA, the main rule states a âbroad basedâ index is comprised of 10 or more securities; likewise, nine or fewer securities are a ânarrow basedâ index.
Under the CFMA, almost all futures and options on stock indices, and smaller variations of indices (commonly known as âE-Minisâ), are considered âbroad basedâ indices, treated as commodities.
This is good news, because commodities have lower tax rates than securities and now almost all indices are commodities.
At the time of writing this article, we did not find one index that is considered ânarrow basedâ and taxed as a security.
Single stock futures are taxed like securities
The IRS states that, "a gain or loss on the sale, exchange, or termination of a securities futures contract generally has the same character as gain or loss from transactions in the underlying security."
"For example, if the underlying asset would be a capital asset in the hands of the taxpayer, gain or loss from the sale of the contract is a capital gain or loss. This rule does not apply to securities futures contracts that are not capital assets (they are inventory assets), nor does it apply to products identified as hedging transactions, or any income derived in connection with a contract that would otherwise not produce a capital gain. Except as provided in the regulations, capital gain or loss from the sale, exchange or termination of a securities futures contract to sell property is treated as short-term capital gain or loss."
"A securities futures contract generally is defined as a contract of sale for future delivery of a single security or a narrow-based security index."
For more information on single-stock futures, click here.
Securities traders pay higher taxes
Before the mid-1980s, the IRS treated all buyer and sellers of âcapital assetsâ (securities and commodities) in the same manner.
Securities trading ârealizedâ gains are âshort-termâ capital gains subject to âordinaryâ (marginal) tax rates, with the exception being that if you hold a security position open for 12 months or longer, you benefit from a lower long-term capital gains tax rates (20 percent vs. 38.6 percent). To pay for long-term capital gains rates, Congress subjects securities traders to the onerous wash-sale loss and straddle-loss deferral rules. Few securities traders keep positions open for 12 months, so they pay the higher tax rate and are also penalized with wash sale and straddle rules. This is simply not fair, but it is the rule.
In general, âsecuritiesâ include: stocks, stock options (equity options), narrow-based indices, single-stock futures (taxed like their underlying stocks), mutual funds, exchange traded funds (QQQs, iShares, SPDRs, etc.) and bonds.
The taxability of options on ETF shares, where the underlying portfolio or index is âbroad basedâ is currently uncertain and requires guidance from the IRS.
I just went throught this whole thing this tax season. Here's the summary:
Options on SPX/OEX fall under the Section 1256 umbrella which means that they get 60/40 tax treatment (a wonderful thing), loss carryback up to 3 years (instead of loss carryforward) and are marked-to-market at year's end (not to be confused with marked-to-market election for traders which is a completely different subject).
Options on SPX/OEX fall under the Section 1256 umbrella which means that they get 60/40 tax treatment (a wonderful thing), loss carryback up to 3 years (instead of loss carryforward) and are marked-to-market at year's end (not to be confused with marked-to-market election for traders which is a completely different subject).