Quote from Trader KGB:
Nonequity options (options on SPY, DIA, other ETFs) do qualify for 1256, even though the underlying ETFs themselves don't qualify. That's probably where part of the confusion/mis-info stems from.
http://www.tradersaccounting.com/faq_answers.php?id=32
I'm not so sure that the folks at Traders Accounting are correct. While they are of the opinion that the ETF options (SPY, QQQ, DIA, etc.) are subject to the 1256 rules (i.e. 60/40 taxation) others are not that certain.
Robert Green (
http://www.greencompany.com/) said, in a teleconference recently, that the IRS still has not issued any guidance on the subject. Indeed I just spent a half hour searching the IRS' web site and could find no mention of options on ETFs or ETF based options. Not in Publication 550, not in their revenue bulletins, or in any case law.
ThinkorSwim puts the SPYs in the Equity (vice Index) category.
I've checked the IRS we site and looked in Publication 550, Internal Revenue Bulletins, case law, and elswhere and can find NO official government document that characterizes ETF options as 1256 contacts.
Here's a few links which discuss the subject:
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Traders Accounting says YES.....................
http://www.tradersaccounting.com/faq_answers.php?id=32 says, in part;
"Yes, the options on the QQQ day trading and the other exchange-traded options of index stocks are subject to the provisions of IRS Code Section 1256 broad based index."
TradeLog says they don't know.
http://www.armencomp.com/options-capital-gains.html
Broad-Based Index Options
If you trade index options, or other non-equity options such as on bonds, commodities or currencies, the results of a sale are treated differently.
For example, options on the SPX, OEX, and NDX are not directly or indirectly related to a specific equity (stock), but are exchange-traded options of index stocks. These are subject to the provisions of IRS Code Section 1256, which states that any gains or losses from the sale of these securities are subject to the 60/40 rule (60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held). Non-equity options are usually reported on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles).
Please see our Broker Support page for a complete list of index options marked by TradeLog as section 1256 contracts.
There have been many conflicting opinions as to whether QQQQ, DIA, and SPY options should be treated as section 1256 contracts or not. Since these do not settle in cash, as do most section 1256 contracts, some suggest that these are not section 1256 contracts. Others feel that they meet the definition a a "broad-based" index option and therefore can be treated as section 1256 contracts.
The IRS is not clear on this, so we defer to the tax professionals, such as Robert A. Green, CPA. On his
www.GreenTraderTax.com web site, under the Securities vs. Commodities topic, Green defines these as securities, and not section 1256 contracts. See: Securities vs Commodities under the sub-heading "Securities traders pay higher taxes."
As always it is best to contact your tax professional for advice before arbitrarily categorizing your index options trades.
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Robert Green (author "The Tax Guide for Traders) says more information of
http://www.greencompany.com/EducationCenter/GTTRecSecuritiesVsCommodities.shtml
Forget the Rule of Thumb: Give Me a List of Securities, Please
OK, letâs just break this down to make it easier. Securities include but are not limited to:
Exchange Traded Funds (ETFs) including QQQ, DIA and SPDRs;
Stocks, stock options, mutual funds, and bonds;
Single stock futures, otherwise known as ânon-dealer securities futures contracts;â
By default, any âcapital assetâ that is not otherwise defined as an IRC Section 1256 contract (a commodity) or IRC Section 988 (currencies, inter-bank foreign exchange or FOREX). For example, gold bullion sounds like a commodity or currency, but physical gold is neither included in IRC section 1256 or 988, and itâs taxed like securities. That means if you hold gold bullion bars for more than 12 months, you are entitled the lower long-term capital gains rate (currently 15 percent).
The taxability on options on ETFs, where the underlying portfolio or index is broad-based, is currently uncertain and requires guidance from the IRS.
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http://mediaserver.thinkorswim.com/transcripts/Jan_25_2006_The_2005_Tax_Report.pdf
The Options Clearing Corporation Tax Guide still does not say that the IRS has settled the matter of whether ETFs get equity treatment or index treatment, so we have taken the conservative view and put them in the equity bucket.
