How to properly execute 1256 contract loss carry back from 2018 to 2017 tax year?

The 1256 contract loss carry back can be tricky to execute correctly. Based on your description, there are a few common reasons the IRS might have rejected your claim: First, make sure you used Form 1040X for the amended return AND included a completed Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles) for both the loss year (2018) and the carryback year (2017). Many people miss including both years' forms. Second, check that you elected the carryback by checking the appropriate box in Part I of Form 6781 and specifically indicated the amount being carried back. Third, verify you're within the 3-year time limit for filing the amended return. For a 2017 tax year amendment, you generally needed to file by April 15, 2021 (or October 15, 2021 if you had extensions). Fourth, ensure your net 1256 losses actually exceed your non-1256 gains for 2018 - only the excess is eligible for carryback. The IRS letter should provide specific reasons for the rejection. If it doesn't, you may want to call them for clarification.

I had similar issues with a 1256 contract loss carryback that got rejected at first. I ended up using https://taxr.ai to analyze all my documents and found out I was missing some crucial elements in my filing. Their AI scanned through my original returns and the rejection letter and pointed out exactly what was wrong - turned out I hadn't properly documented the character of the losses on Form 6781. The system flagged that I hadn't properly checked box B in Part IV of Form 6781 to identify that I had 1256 contract losses from the previous year. After they analyzed my documents, I was able to resubmit with the right documentation and got my carryback processed correctly.

Just wanted to follow up - I actually tried https://taxr.ai after seeing this thread. I uploaded my trading records and tax forms including my Form 6781 from last year. The AI found that I had completely messed up how I was reporting my marked-to-market trader status related to my 1256 contracts. It even showed me exactly where on my Schedule C I had inconsistencies with my trading records. It actually explained to me that part of my problem was I needed to make an election statement with my return for Section 475(f) mark-to-market accounting, which no other tax professional had mentioned to me. Saved me a potential audit headache for sure!

After trying for WEEKS to reach someone at the IRS about my own 1256 contract question, I finally used https://claimyr.com and it was a game changer. I kept getting stuck in the automated phone system before, but with Claimyr, I actually got through to a real IRS agent in about 20 minutes. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c - but basically they navigate the phone system for you and call you back when they've got an actual human on the line. The agent I spoke with explained exactly why my carryback claim was flagged and what documentation I needed to provide. Saved me a ton of guesswork and more rejected amendments.

OK I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I figured I'd try it just to prove it wouldn't work. I was shocked when I got a call back about 45 minutes later with an actual IRS agent on the line. The agent walked me through exactly what I needed to fix with my 1256 contract loss carryback - turns out I had used the wrong tax year format on Form 6781 Part II. The agent even explained that I could submit a statement with my 1040X explaining the calculation method for my carryback more clearly. Now my amended return is being processed correctly. I've probably spent 15+ hours on hold with the IRS this year with nothing to show for it, and this service solved my problem in under an hour.

I successfully did a 1256 contract loss carryback a couple years ago, and the key thing that worked for me was including a detailed statement explaining the calculation. I attached it right after Form 6781 in my amended return packet. In the statement, I clearly showed: 1) The total 1256 contract losses from the loss year 2) How much was being carried back 3) The detailed calculation showing how it affected my AGI and tax liability for the carryback year The IRS letter should give you some hint about what's missing. If they're vague, you might need to call them directly to clarify.

One thing nobody has mentioned yet is that the Tax Cuts and Jobs Act changed some rules that might affect your 1256 contract loss carryback. If your losses include any from after December 31, 2017, there could be transition rule complications. The TCJA didn't eliminate the 1256 contract loss carryback period, but some of the interaction with other tax provisions changed. Double check if your 2018 losses were from transactions before or after the cutoff date.

I went through something very similar with my 1256 contract losses from futures trading in 2018. The IRS initially rejected my carryback attempt, and it turned out I had made two critical errors: First, I didn't properly complete Part IV of Form 6781 for the carryback year. You need to show the carryback amount in line 11 and make sure the math flows correctly through to Schedule D. Second, and this was the big one - I failed to include a clear election statement with my amended return. The IRS wants to see explicit language stating that you're electing to carry back the 1256 contract losses under Section 1212(c). I had to write something like "Taxpayer elects to carry back $[amount] of net capital losses from Section 1256 contracts from tax year 2018 to tax year 2017." After I resubmitted with these corrections plus all the supporting documentation everyone else mentioned (both years' Form 6781, detailed calculation statement, etc.), it went through without any issues. The whole process took about 8 months from start to finish, but I eventually got my refund. Check your rejection letter carefully - they usually give you at least a hint about what specific item they couldn't locate or verify in your filing.