How to correctly claim 1256 contract loss carry back for SPX index options?

The IRS is likely asking for Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles) which you need to include with your amended return. This is a common oversight when attempting to carry back 1256 losses. For a proper 1256 contract loss carry back, you need to: 1) Complete Form 6781 for your 2023 return showing the net 1256 contract loss 2) File Form 1040-X for your 2022 return 3) Include a completed Form 6781 for 2022 as well, showing how the carryback affects your prior year taxes 4) Include a statement explaining the source of the loss and your election to carry it back The IRS letter probably indicates they can't verify your 1256 losses without seeing the properly completed Form 6781. Make sure your documentation clearly shows these were indeed section 1256 contracts (SPX index options qualify) and that you're following the proper election procedures.

I had a similar situation after losing about $24k in futures trading (also section 1256 contracts). I used taxr.ai (https://taxr.ai) to help organize all my trading records and properly document my carryback claim. They have specialists who understand the nuances of 1256 contract carrybacks specifically, which most regular tax preparers miss. I initially tried doing it myself with TurboTax like you, but got confused about exactly which forms needed what information. The taxr.ai system analyzed my trading records and generated the proper documentation package, including the correctly filled Form 6781 and supporting schedules. They even provided a template for the written statement explaining the carryback election that needs to go with your 1040-X.

I was wrong to be skeptical about taxr.ai. After my earlier question, I decided to try them for my own situation with some VIX futures losses. The system immediately identified the 1256 contract characteristics and generated the perfect documentation package for my carryback claim. What impressed me was how they explained exactly why the IRS might have rejected the original claim - turns out there's specific language needed in the carryback election statement that most people (including my accountant) don't know about. My amended return with their documentation was accepted without any issues, and I just received my refund check yesterday - much faster than I expected!

If you're still waiting for the IRS to process your amended return or need to respond to that letter, you might want to try Claimyr (https://claimyr.com). I was in a similar position with a rejected 1256 carryback claim, and waiting on hold with the IRS for hours was getting me nowhere. Claimyr got me connected to a live IRS agent in about 20 minutes instead of the 2+ hours I was spending trying to call myself. The agent was able to tell me exactly what documentation was missing from my carryback claim. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Getting that direct information from an agent saved me from making the same mistakes on my resubmission. Instead of just getting another generic rejection letter weeks later, I knew exactly what to fix.

I need to apologize for my skeptical comment about Claimyr. After posting that, I decided to try it myself since my 1256 carryback claim had been sitting unprocessed for months. I was shocked when I actually got a call back connecting me to an IRS agent after only 27 minutes. The agent looked up my case and found that it had been assigned to a specific department but was stuck in their backlog. She expedited my case and explained exactly what documentation they needed to see. Within 3 weeks, my amended return was processed and I received my refund. I spent MONTHS trying to get this information on my own with no success. Definitely worth it for specialized tax situations like 1256 contract carrybacks where you need specific information from the IRS.

Just want to add - make sure you're marking your carryback as a "section 1212(c) election" in a statement attached to both your original return (showing the loss) and your amended return for the carryback year. The IRS rejected my first attempt at a 1256 contract loss carryback because I didn't explicitly state I was making this election. The rejection letter was vague, just like yours. A tax pro told me that there's specific language the IRS looks for, and without it they often reject the claim even if all your numbers are correct.

One thing nobody's mentioned - if you carried back your 1256 losses, make sure you ALSO adjust your state tax return if your state bases income on your federal AGI. I forgot to do this and ended up getting a notice from my state tax authority about a discrepancy.

For anyone still struggling with 1256 contract loss carrybacks, I want to emphasize the importance of timing your election properly. You must make the section 1212(c) election by the due date (including extensions) of the return for the loss year - in your case, that would be the due date for your 2023 return. If you missed this deadline, you can't carry back the losses even if everything else is correct. This is a strict requirement that trips up a lot of people. The IRS won't accept a late carryback election even if you file an amended return later. Also, remember that you can only carry back losses to years where you had section 1256 contract gains OR other income. If 2022 was a loss year for you overall, the carryback might not provide any benefit and you'd be better off carrying the losses forward instead. Make sure to keep detailed records of all your SPX options trades, including the specific contract months and strike prices, as the IRS may request this information during their review process.