26 U.S.C. § 1256: Section 1256 contracts marked to market

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(e)(5), substituted “Section 1256 contracts” for “Regulated futures contracts” in section catchline.

Final rules 2

(a) General rule For purposes of this subtitle—

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Cases: Murphy v. United States, 992 F.2d 929 (9th Cir. 1993)

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(1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1), substituted “section 1256 contract” for “regulated futures contract” and “section 1256 contracts” for “regulated futures contracts” wherever appearing.

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Cases: Murphy v. United States, 992 F.2d 929 (9th Cir. 1993)

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(2) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1),

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Cases: Greene v. United States, 185 F.3d 67 (2d Cir. 1999)

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(3) any gain or loss with respect to a section 1256 contract shall be treated as—

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1), substituted “section 1256 contract” for “regulated futures contract” and “section 1256 contracts” for “regulated futures contracts” wherever appearing.

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Cases: Roberts v. United States, 734 F. Supp. 314 (N.D. Ill. 1990)

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(A) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and

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(B) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and

(4) if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1), substituted “section 1256 contract” for “regulated futures contract” and “section 1256 contracts” for “regulated futures contracts” wherever appearing.

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(b) Section 1256 contract defined

Prop. § 1.1256(b)-1 Proposed 2011 · Section 1256 contract defined.

Amended 1983, 1984, 2000, 2010

2010 Pub. L. 111-203 Pub. L. 111–203 redesignated first sentence as par. (1), inserted heading, redesignated former pars. (1) to (5) as subpars. (A) to (E), respectively, of par. (1), added par. (2), and struck out concluding provisions which read as follows: “The term ‘section 1256 contract’ shall not include any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract.”
2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)(A)], added par. (5) and concluding provisions.
1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(2), in par. (1), substituted “any regulated futures contract” for “with respect to which the amount required to be deposited and the amount which may be withdrawn depends on the system of marking to market; and”, in par. (2), substituted “any foreign currency contract,” for “which is traded on or subject to the rules of a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission or of any board of trade or exchange which the Secretary determines has rules adequate to carry out the purposes of this section. Such term includes any foreign currency contract.”, and added pars. (3) and (4).
1983 Pub. L. 97-448 Pub. L. 97–448, § 105(c)(5)(A), (B), struck out par. (1) which related to contracts requiring delivery of personal property (as defined in section 1092(d)(1)) or an interest in such property, redesignated pars. (2) and (3) as (1) and (2), respectively, and inserted last sentence providing that such term includes any foreign currency contract.

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(1) In general For purposes of this section, the term “section 1256 contract” means—

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(A) any regulated futures contract,

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(B) any foreign currency contract,

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(D) any dealer equity option, and

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(E) any dealer securities futures contract.

(2) Exceptions The term “section 1256 contract” shall not include—

Textual readingANY OF= not a section 1256 contract

(A) any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or

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(B) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.

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Amended 1983

1983 Pub. L. 97-448 Pub. L. 97–448, § 105(c)(1), inserted “, etc.” after “Terminations” in heading and, in text, designated existing first and second sentences as pars. (1) and (3), respectively, added par. (2), inserted “(or transfer)” after “termination” and “(or rights)” after “obligation” in par. (1) as so designated, and substituted “this subsection” for “the preceding sentence” and inserted “(or transfer)” after “termination” in par. (3) as so designated.

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Cases: Greene v. United States, 13 F.3d 577 (2d Cir. 1994); Greene v. United States, 185 F.3d 67 (2d Cir. 1999)

(1) In general The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1)(A), (e)(1)(A), substituted “section 1256 contracts” for “regulated futures contracts”, and “by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse,” for “by taking or making delivery,”.

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Cases: Greene v. United States, 13 F.3d 577 (2d Cir. 1994); Greene v. United States, 185 F.3d 67 (2d Cir. 1999); Greene v. United States, 79 F.3d 1348 (2d Cir. 1996)

(2) Special rule where taxpayer takes delivery on or exercises part of straddle If—

Textual readingALL OF= other contracts treated as terminated

(A) 2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1)(B), substituted “section 1256 contracts” for “regulated futures contracts”.

(B) the taxpayer takes delivery under or exercises any of such contracts,

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(e)(1)(B), substituted “takes delivery under or exercises” for “takes delivery under”.

then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(e)(1)(C), substituted “takes delivery on or exercises” for “takes delivery on” in heading.

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Cases: Greene v. United States, 185 F.3d 67 (2d Cir. 1999)

(3) Fair market value taken into account For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.

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(d) Elections with respect to mixed straddles

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(1) Election The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1)(B), substituted “section 1256 contracts” for “regulated futures contracts”.

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Cases: Roberts v. United States, 734 F. Supp. 314 (N.D. Ill. 1990)

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(2) Time and manner An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.

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(3) Election revocable only with consent An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.

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(4) Mixed straddle For purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))—

“any straddle (as defined in section 1092(c))” Opening words

Textual readingALL OF= a mixed straddle

(A) at least 1 (but not all) of the positions of which are section 1256 contracts, and

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1)(B), substituted “section 1256 contracts” for “regulated futures contracts”.

(B) with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.

“As the Secretary may prescribe” leaves this to Treasury. No regulation cites this provision (eCFR, Oct 19, 2026)

Amended 1983, 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(a)(1)(A), substituted “section 1256 contract” for “regulated futures contract”.
1984 Pub. L. 98-369 Pub. L. 98–369, § 107(c), inserted “(or such earlier time as the Secretary may prescribe by regulations)”.
1983 Pub. L. 97-448 Pub. L. 97–448, § 105(c)(2), substituted “day on which the first regulated futures contract forming part of the straddle is acquired” for “day on which such position is acquired”.

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(e) Mark to market not to apply to hedging transactions

§ 1.1256(e)-1 Identification of hedging transactions.§ 1.1256(e)-2 Special rules for syndicates.

Amended 1984, 1986

1986 Pub. L. 99-514 Pub. L. 99–514 redesignated par. (5) as (4) and struck out former par. (4), special rule for banks, which read as follows: “In the case of a bank (as defined in section 581), subparagraph (A) of paragraph (2) shall be applied without regard to clause (i) or (ii) thereof.”
1984 Pub. L. 98-369 Pub. L. 98–369, § 104(a), added par. (5).

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(1) Section not to apply Subsection (a) shall not apply in the case of a hedging transaction.

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(2) Definition of hedging transaction For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.

Amended 1984, 1999

1999 Pub. L. 106-170 Pub. L. 106–170 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “For purposes of this subsection, the term ‘hedging transaction’ means any transaction if—
“(A) such transaction is entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—
“(i) to reduce risk of price change or currency fluctuations with respect to property which is held or to be held by the taxpayer, or
“(ii) to reduce risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer,
“(B) the gain or loss on such transactions is treated as ordinary income or loss, and
“(C) before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.”
1984 Pub. L. 98-369 Pub. L. 98–369, § 107(d), inserted “(or such earlier time as the Secretary may prescribe by regulations”.

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(3) Special rule for syndicates

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(A) In general Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate.

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(B) Syndicate defined For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(k)(4)).

Amended 1982, 2018

2018 Pub. L. 115-141 Pub. L. 115–141 substituted “section 461(k)(4)” for “section 464(e)(2)”.
1982 Pub. L. 97-354 Pub. L. 97–354 substituted “an S corporation” for “an electing small business corporation within the meaning of section 1371(b)”.

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(C) Holdings attributable to active management For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 461(k)(4))—

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141 substituted “section 461(k)(4)” for “section 464(e)(2)”.

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(i) for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity,

Textual readingALL OF= not treated as held by limited partner

“such interest is held by an individual”

“who actively participates at all times during such period in the management of such entity”

(ii) for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,

Textual readingALL OF= interest not treated as limited partner's

“during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,”

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(iii) if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years,

Textual readingALL OF= not treated as limited partner holding

“such interest is held by an individual who actively participated in the management of such entity”

“for a period of not less than 5 years”

(iv) if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or

Textual readingANY OF= interest not treated as limited partner'sGate Wizard 🧙

“such interest is held by the estate of an individual who actively participated in the management of such entity”

“is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii)” needs § 1256(e)(3)(C)(ii)

(v) if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes.

Amended 1983

1983 Pub. L. 97-448 Pub. L. 97–448, § 105(c)(3), inserted “(by regulations or otherwise)” after “determines”.

For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.

(4) Limitation on losses from hedging transactions

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514 redesignated par. (5) as (4) and struck out former par. (4), special rule for banks, which read as follows: “In the case of a bank (as defined in section 581), subparagraph (A) of paragraph (2) shall be applied without regard to clause (i) or (ii) thereof.”

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(A) In general

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(i) Limitation Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.

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(ii) Carryover of disallowed loss Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.

(B) Exception where economic loss Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.

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(C) Exception for certain hedging transactions In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).

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(D) Hedging loss The term “hedging loss” means the excess of—

(i) the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over

(ii) income received or accrued by the taxpayer during such taxable year from such transactions.

(E) Unrecognized gain The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).

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(f) Special rules

(1) Denial of capital gains treatment for property identified as part of a hedging transaction For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.

Amended 2005

2005 Pub. L. 109-135 Pub. L. 109–135 substituted “subsection (e)(2)” for “subsection (e)(2)(C)”.

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(2) Subsection (a)(3) not to apply to ordinary income property Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss.

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(3) Capital gain treatment for traders in section 1256 contracts

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 102(b), added pars. (3) and (4).

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(A) In general For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.

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(B) Exception for certain hedging transactions Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.

Textual readingALL OF= subparagraph (A) does not apply

“to any section 1256 contract to the extent such contract is held for purposes of hedging property”

“if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.”

(C) Treatment of underlying property For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.

(4) Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneurs In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))—

Amended 1984, 2000

2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(2)], inserted “and dealer securities futures contracts” after “dealer equity options” in heading and “, or dealer securities futures contracts,” after “dealer equity options” in introductory provisions.
1984 Pub. L. 98-369 Pub. L. 98–369, § 102(b), added pars. (3) and (4).

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(A) paragraph (3) of subsection (a) shall not apply to any such gain or loss, and

(B) all such gains or losses shall be treated as short-term capital gains or losses, as the case may be.

(5) Special rule related to losses Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).

Amended 2002

2002 Pub. L. 107-147 Pub. L. 107–147 added par. (5).

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