Form 6781: How are short 1256 contracts treated when held past tax year end?
I've got a situation with some 1256 contracts (SPX Put spread) that I held past December 31st into this year, and I'm completely stuck on how to report this in my taxes. I had a spread with two legs - a long position on the 4850 strike that gained about $215, and a short position on the 4950 strike that lost around $320. The issue I'm having is that TurboTax won't let me enter a negative number for the cost basis on the short leg. When I try to input each leg separately (which I assume is what the IRS wants), I hit this wall with the software. I can't just combine them either since I think the IRS wants each component of the spread detailed individually. Is there some special rule for reporting shorted 1256 contracts that are held into the next tax year? The form instructions mention something about treating the contract as if it were something, but it cuts off there. Any tax pros familiar with Form 6781 and how to handle this situation? I'm getting close to the filing deadline and really need some guidance here.
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Daniela Rossi
This is a common issue with 1256 contracts crossing tax years. For the short position, you need to enter it differently - instead of trying to use a negative cost basis, you should be entering it as a "Sale" with the proceeds being the amount you received when you opened the short position. When reporting on Form 6781, each leg of an options spread should indeed be reported separately. For a short option, your "Cost" would be what you paid to close the position (or its fair market value on December 31 if still open at year end), and your "Proceeds" would be what you initially received when you opened the short position. The 60/40 tax treatment for 1256 contracts applies to each individual position. Remember that under Section 1256, all contracts are treated as if they were sold (closed out) on December 31 at fair market value, regardless of whether you actually closed the position or not. This is called the "mark-to-market" rule.
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Ryan Kim
•Wait I'm confused. So for my short put, the amount I received when I opened it would be the proceeds, but what about the cost basis? Would that be what I paid to close it out (which was more than what I received, hence the loss)? And then for the long put, I'd list the amount I paid as the cost and what I received when I sold it as the proceeds, right? Also, if they were marked-to-market on Dec 31, do I need to show that "phantom" close and then reopening on Jan 1 somehow? TurboTax isn't really clear on this.
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Daniela Rossi
•For your short put, that's correct - the proceeds would be what you received when opening the position, and the cost would be what you paid to close it out. Since you paid more to close than you received when opening, that's where your loss comes from. For the long put, you're exactly right - list what you paid as the cost and what you received as the proceeds. For the mark-to-market treatment, you need to report the position as if it were closed on December 31 at fair market value, and then reopened on January 1 with the same fair market value as your new basis. TurboTax should have a way to enter these as separate transactions, with one showing the "deemed sale" on December 31 and another showing the subsequent actual close. Look for an option to enter the December 31 fair market value - this becomes crucial for calculating the correct gain/loss for each tax year.
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Zoe Walker
After dealing with a similar issue last year, I found that using taxr.ai (https://taxr.ai) made handling 1256 contracts so much easier. Their system automatically understands the mark-to-market rules and properly handles short positions in spreads without the weird issues you're experiencing in TurboTax. I was struggling with proper reporting of some VIX futures that spanned year-end and was getting contradictory advice from different tax forums. Their tool correctly split the gains between tax years and formatted everything properly for Form 6781. It also handles the proper 60/40 split between long-term and short-term capital gains automatically.
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Elijah Brown
•Does it work with imported data from brokerages? My broker is Interactive Brokers and they give me a tax report but it doesn't properly split the mark-to-market stuff correctly. Also, do they handle more complex stuff like straddles or mixed straddles? My CPA doesn't even understand this stuff.
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Maria Gonzalez
•I'm skeptical about any service claiming to handle 1256 contracts correctly. Most software gets it wrong. How does it handle the wash sale rules that don't apply to 1256 contracts but sometimes brokers still flag them incorrectly in their reports?
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Zoe Walker
•Yes, it works with imported data from most major brokerages including Interactive Brokers. It recognizes the imported data and then recalculates everything according to proper 1256 treatment, correcting any mistakes in the brokerage's reporting. I had similar issues with my broker not splitting things correctly. The system definitely handles complex situations like straddles and mixed straddles. It has specific workflows for identified mixed straddles, mixed straddle accounts, and straddle-by-straddle identification. My trading involves some complicated setups with both 1256 and non-1256 positions that work as hedges, and it handled all of that correctly.
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Elijah Brown
Just wanted to follow up about my experience with taxr.ai after the recommendation here. This thing is seriously a game-changer for options traders. I uploaded my Interactive Brokers statements and it correctly identified all my 1256 contracts, properly applied the mark-to-market rules, and fixed the reporting issues. The best part was how it handled my SPX spreads that crossed year-end - it properly showed the deemed sale on Dec 31 and then the actual closing transactions in January. The 60/40 split was calculated correctly and everything mapped perfectly to Form 6781. It even flagged where my broker had incorrectly applied wash sale rules to 1256 contracts (which are exempt) and fixed the reporting. Definitely worth checking out if you're dealing with these types of complex trading situations.
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Natalie Chen
If you're still getting nowhere with the tax software and need to talk to an actual IRS agent who understands 1256 contracts (which is rare), I'd recommend Claimyr (https://claimyr.com). I was in a similar situation last year with some S&P futures contracts and needed guidance directly from the IRS. Instead of spending hours on hold, Claimyr got me connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent I spoke with was surprisingly knowledgeable about 1256 contracts and confirmed exactly how to report my short positions that spanned the tax year.
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Santiago Martinez
•How exactly does this work? Do they just call the IRS for you? I've been on hold for literally 3+ hours multiple times trying to get someone who knows about Form 6781. Did you actually get someone who understood Section 1256 contracts?
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Maria Gonzalez
•This sounds like BS honestly. The IRS phone agents barely understand basic tax situations, let alone complex issues with 1256 contracts and mark-to-market rules. I doubt they'd give any useful advice on something this technical. You probably need a tax attorney who specializes in securities.
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Natalie Chen
•They don't just call for you - it's more sophisticated than that. They use a system that navigates the IRS phone tree and holds your place in line. When an actual agent is about to pick up, you get a call connecting you directly to that agent. They basically handle the hold time so you don't have to sit there for hours. Yes, I actually did get someone who understood Section 1256 contracts, though I had to ask to be transferred to a specialized department. Not every agent will know about these rules, but there are some who work specifically with investment-related tax issues. The key is getting through to the right department, which is where saving hours of hold time really helped.
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Maria Gonzalez
I've got to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate for help with my 1256 contracts reporting. The service connected me within 25 minutes (compared to my previous 3+ hour waits), and after asking to be transferred to someone who handles investment tax issues, I got an agent who clearly understood Section 1256 contracts. They explained exactly how to report short positions spanning tax years and clarified that the cost basis for the short position should be reported as a positive number representing the closing cost, while the opening amount received goes under proceeds. The agent even emailed me specific instructions for TurboTax on how to override their input limitations. Saved me from filing incorrectly and potentially getting hit with an amendment later.
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Samantha Johnson
Another approach is to use a different tax software. I switched from TurboTax to TaxAct this year specifically because of issues with options reporting. TaxAct handled my 1256 contracts correctly and even has a specific section for mark-to-market positions that cross year boundaries. For your specific situation, you just need to enter the short put with positive numbers but in reverse order: the amount you received when opening the short position goes in the "proceeds" column, and the amount you paid to close it goes in the "cost" column. That way it properly calculates as a loss.
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Nick Kravitz
•Does TaxAct handle the 60/40 split correctly for 1256 gains? I've had issues with other software where I have to manually calculate and input that split. Also, how does it handle the mark-to-market valuation if you don't know the exact value on December 31st?
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Samantha Johnson
•Yes, TaxAct handles the 60/40 split automatically once you identify the position as a Section 1256 contract. It's actually much better than TurboTax in this regard since it does the calculations for you rather than making you determine the split manually. For the mark-to-market valuation, it lets you enter the December 31st value directly. If you don't know the exact value, most brokers provide this in their year-end statements. If you still can't find it, you can use the closing price of the contract on the last trading day of the year as a reasonable approximation. TaxAct has a field specifically for this December 31st valuation, which then handles the deemed sale/repurchase mechanics automatically.
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Hannah White
I actually had this exact issue with a /ES futures spread last year. The trick is to reverse how you think about the short position. For Form 6781: 1. For the short position: Put the amount you RECEIVED when opening the position as the PROCEEDS, and the amount you PAID to close it as the COST. 2. For the long position: Put the amount you PAID when opening as the COST, and the amount you RECEIVED when closing as the PROCEEDS. This way both will calculate correctly - the long showing a gain and the short showing a loss.
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Michael Green
•This is super helpful! Quick question though - for the portion that was marked-to-market at year end but not actually closed, do you still report it this way? And then do you have a second entry for when you actually closed the position the following year?
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Natasha Kuznetsova
•Yes, for positions marked-to-market at year end but not actually closed, you need two separate entries. First entry: treat it as if you closed on Dec 31 at fair market value - for the short position, use the Dec 31 value as your "cost" and the original amount received as "proceeds." Second entry: for the actual closing in the following year, your new "cost basis" becomes that Dec 31 fair market value, and your "proceeds" are what you actually received when closing. So if you held a short put past year end, you'd have one Form 6781 entry showing the deemed close on Dec 31, and then when you file next year's taxes, another entry showing the actual close using the Dec 31 value as your starting point. This ensures each tax year captures the correct portion of the gain/loss.
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Zoe Dimitriou
I ran into this exact same issue with SPX spreads last year and it was incredibly frustrating until I figured out the correct approach. The key insight that finally made it click for me was understanding that for short positions on Form 6781, you're essentially reporting a "reverse transaction" - what you received becomes proceeds, what you paid becomes cost. For your specific situation with the SPX put spread: - Short 4950 put: Proceeds = amount you received when opening the short position, Cost = amount you paid to close it (resulting in your $320 loss) - Long 4850 put: Cost = amount you paid when opening, Proceeds = amount you received when closing (resulting in your $215 gain) The mark-to-market rule is crucial here. Since you held these past December 31st, you need to report the "deemed sale" at fair market value on Dec 31 for this tax year's return. Then when you file next year, you'll report the actual closing transactions using the Dec 31 values as your new basis. Most tax software struggles with this, but the underlying tax treatment is straightforward once you understand the mechanics. The 60/40 split applies to each leg separately, so you'll get the favorable tax treatment on both the gain and loss portions.
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