How are taxes calculated on day trading futures - 60/40 rule vs normal income?

You're right about the 60/40 rule for futures trading! This is actually one of the tax advantages of trading futures contracts. Regardless of how long you hold the contracts (even if just for minutes in day trading), your profits are automatically treated under the 60/40 rule. Here's how it works: 60% of your gains are taxed at the long-term capital gains rate (which is lower, maxing out at 20% for high incomes) and 40% are taxed at your ordinary income tax rate (which can go up to 37% federally). For $3.2 million in profits, you're definitely in the highest tax brackets. Assuming you have no other significant income or deductions, your federal tax would be roughly: 60% of $3.2M ($1.92M) taxed at 20% = $384,000, plus 40% of $3.2M ($1.28M) taxed at 37% = $473,600, for a total federal tax of around $857,600. Then yes, you'd also owe Illinois state tax, which is a flat 4.95% on income, so that's another $158,400. Don't forget about the 3.8% Net Investment Income Tax that applies to high-income taxpayers, which would be another $121,600. So very roughly, your take-home would be around $2,062,400 after these taxes. But with amounts this large, I'd strongly recommend working with a tax professional who specializes in trader taxation.

After spending literally months trying to figure out how to properly report my futures trading gains, I finally found taxr.ai (https://taxr.ai) and it saved me SO much stress. Last year I had about $450k in futures trading profits and was totally lost about how to handle the 60/40 rule correctly. The service analyzed all my trading documentation and automatically identified which trades qualified for Section 1256 treatment. It even showed me how to properly report everything on Form 6781 and calculated the tax split automatically. Saved me from potentially making a $30k+ mistake on how I was calculating my taxes! The coolest part was that it showed me how to properly handle wash sales with futures (which work differently than stocks) and identified some deductions related to my trading expenses I didn't know I could take.

Just wanted to follow up on my question about using taxr.ai retroactively. I decided to give it a try after our conversation here, and wow - wish I'd known about this sooner! Uploaded my trading records from 2023 and 2022, and turns out I overpaid by almost $42k across both years by incorrectly reporting my futures trades as regular short-term capital gains. The system automatically generated my amended returns with the correct 60/40 split on Form 6781. Already filed the amendments and got confirmation they're being processed. What's crazy is I had asked my regular accountant about this and they told me futures were just treated like normal trading profits! Goes to show you need specialists for this stuff. Now I'm properly set up for this year too. With the calculation tools they provide, I can see exactly how much I need to set aside from each profitable trade. Makes planning so much easier!

If you're making millions in futures trading, you're probably also dealing with the nightmare of trying to get someone at the IRS on the phone when questions come up (and they WILL come up with complex trading tax situations). I was on hold for over 4 hours trying to get clarification about some aspects of Form 6781 last year. I started using Claimyr (https://claimyr.com) after seeing a video about it (https://youtu.be/_kiP6q8DX5c) and it completely changed my experience. They somehow get you connected to an IRS agent usually within 15-45 minutes instead of the hours-long wait times I was experiencing before. When I had questions about how to properly report some complicated futures spread strategies and whether they qualified for Section 1256 treatment, I was able to speak directly with an IRS tax specialist who gave me the exact guidance I needed. Saved me thousands in potential penalties from incorrect reporting.

I need to eat my words from my previous comment. After continuing to fail at getting through to the IRS about a futures trading question (was on hold for 2+ hours before getting disconnected TWICE), I broke down and tried Claimyr. Got connected to an actual IRS tax specialist in 27 minutes. The agent confirmed that my specific trading pattern in futures still qualified for 60/40 treatment even though I occasionally held positions for several days (was worried this might disqualify me from Section 1256 treatment). The time savings alone was worth it, but the peace of mind from getting an official answer directly from the IRS instead of relying on internet forums was even better. Looks like I'll be keeping more of my trading profits than I thought!

Quick heads up that might help - make sure you're tracking your trading expenses properly too. As a high-volume futures trader, you might qualify for trader tax status (TTS) which can give you significant additional deductions. With TTS, you can deduct expenses like your trading platform fees, market data subscriptions, home office expenses, computer equipment, education costs, and even potentially a portion of your internet and utilities as ordinary business expenses rather than limited investment expenses. At your profit level, this could potentially save you tens of thousands in taxes. You'd need to meet certain criteria though - like trading frequency, holding periods, and time commitment to trading.

What futures broker are you using? I'm getting wrecked by the tax reporting from my current broker. Their 1099s are a nightmare and don't clearly separate section 1256 contracts.

Great question about futures taxation! I've been trading futures for a few years now and can confirm what others have said about the 60/40 rule. One thing I'd add is that you should also consider the wash sale rules, which work differently for futures compared to stocks. With futures contracts under Section 1256, wash sales don't apply the same way they do for securities. This means you can actually realize losses for tax purposes even if you immediately re-enter a similar position, which can be helpful for tax planning throughout the year. Also, since you're projecting such significant profits, you might want to look into making estimated quarterly tax payments to avoid underpayment penalties. The IRS generally wants you to pay as you go, especially with income this large. You can use Form 1040ES to calculate and make these payments. One last tip - keep detailed records of all your trading activity, including timestamps, contract specifications, and P&L for each trade. The IRS can be pretty strict about substantiating trading income, especially at higher amounts. Having clean records will save you headaches if you ever get audited.