Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, is used to report:
- Any gain or loss on IRC Section 1256 contracts under the mark-to-market rules, and
- Gains and losses under IRC Section 1092 from straddle positions.
A Section 1256 contract is any of the following:
- A regulated futures contract;
- A foreign currency contract;
- A nonequity option, such as a debt option, commodity futures option, currency option, and broad-based stock index option;
- A dealer equity option;
- A dealer securities futures contract (must indicate "dealer").
For tax purposes, a Section 1256 contract held at the end of the year is assigned a fair-market value using mark-to-market rules and is treated as if it was sold at the end of year, with 60% of the gain or loss treated as long-term and 40% of the gain or loss treated as short-term. (When a Section 1256 contract is sold, the gain or loss is treated with the same 60/40 split.) One exception to the 60/40 rule is a contract that is identified as a hedge when it is purchased. Gain from the sale of a hedge is treated as ordinary income.
A net loss on Section 1256 contracts can be carried back up to 3 years if desired. This election is made by selecting Election D, Net section 1256 contracts loss election in Form 6781. If this election is made, you will be queried for the amount of the net Section 1256 loss being carried back, and the amount will be included on Form 6781 Line 6.
A straddle is an investment strategy in which an investor purchases offsetting contracts on an investment, i.e., purchasing both a call option and a put option. Both options have the same exercise price and the same expiration date.
A mixed straddle has several important characteristics:
- It isn't part of a larger straddle;
- At least one position, but not all positions, is a Section 1256 contract;
- All positions are held as capital assets;
- The mixed straddle election (see below) hasn't been made.
There are three possible elections that can be made with respect to mixed straddles. Note that a taxpayer may make only one of these elections.
- Election A, Mixed Straddle Election: This election elects out of applying mark-to-market rules for the Section 1256 contracts that are part of the straddle. (The effect of this election is that the gains and losses from the assets and the Section 1256 contract are recognized at the same time.) Certain stipulations apply, and this election, once made, can only be revoked with IRS permission.
- Election B, Straddle-by-straddle identification election: With this election, each position is identified and treated separately, and the treatment of the gain or loss depends on whether it was due to the Section 1256 contracts or the non-Section 1256 contracts.
- Election C, Mixed straddle account election: This election is used to group positions into classes of activities for the purpose of offsetting gains and losses.
In determining the tax treatment of these items, IRS Publication 550 is both informative and authoritative.
Note that if a foreign currency contract involves a nonfunctional currency as defined in Section 988, you will need to attach to the tax return a statement detailing the transactions and where the gain or loss is reported in the return.
To complete Form 6781 in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Capital Gain/Loss (Sch D)
- Other button
- Form 6781 - Gains/Losses from Sec 1256 Gains & Straddles
Type of Election - Indicate any of the elections that apply, but note that only one of A, B, or C may apply, if any.
Part I - Section 1256 Contracts Marked to Market - For transactions related to Section 1256 contracts, select New and enter the description and the Form 1099-B Box 11 amount.
- If you have a Form 1099-B or substitute, enter the description "1099-B" plus the broker's name;
- If you have something other than a Form 1099-B or substitute, enter an appropriate description.
- If filing an amended return due to carrying back a Section 1256 loss from the following year, enter the description “Net sec 1256 contracts loss from” plus the tax year.
If any adjustments need to be made, such as in the case of a hedge, select 1099-B and enter them. The total adjustments will be entered on Form 6781 Line 4 and a statement will be attached to the return with the explanations you enter. See Publication 550 for the rules that apply to hedging transactions and how to adjust.
Part II - Gains & Losses from Straddles
Don't include in Part II a disposition from any of the following:
- A position that is part of a hedging transaction.
- A loss position included in an identified straddle established before October 22, 2004, unless the taxpayer disposed of all of the positions making up the straddle.
- A loss position included in an identified straddle established after October 21, 2004.
- A position that is part of a straddle if all of the positions of the straddle are section 1256 contracts.
Select New and enter all the requested information except for the cost. When finished, select Ok.
- In the Statement window, select New and enter the cost or basis along with a statement describing the cost or basis. When finished, select Ok.
- For returns filing MFJ, indicate the owner of the straddle, whether taxpayer, spouse, or joint.
Part III - Unrecognized Gains from Positions Held - Part III does not need to be completed if the taxpayer doesn't have a recognized loss on any position. Include in Part III positions held at the end of the tax year if the fair market value exceeds the cost, but exclude the following positions:
- positions that are part of an identified straddle;
- positions that are part of a hedging transaction;
- inventory or stock in trade;
- depreciable property used in a trade or business.
To make an entry in Part III
- Select New and enter the requested information. When finished, select Ok.
- For returns filing MFJ, indicate the owner of the position, whether taxpayer, spouse, or joint.
Note: This is a guide on entering information into Form 6781 in the TaxSlayer Pro program. This is not intended as tax advice.
Publication 550, Investment Income and Expenses