Introduction

The universe of futures presents highly leveraged opportunities. However, if you are a trader considering futures trading, you should have a fundamental understanding of the way that futures are taxed. In this blog, we will be covering exactly that.

How are Futures Taxed?

Compared to equity traders, future traders benefit from a more favorable treatment of taxes. According to section 1256 of the IRC (Internal Revenue Code), ‘any futures contract traded on a U.S exchange, foreign currency contract, dealer equities option, dealer securities futures contract, or non-equity options contract are taxed at 60% of the long-term capital gains rates and short-term capital gains rates at 40% - regardless of how long the trade was held.’ Since the highest capital gains rate for the long-term is 20%, while the maximum short-term rate stands at 20%, the average maximum combined tax rate would be 26.8%.

Taxes are always a major factor for traders and investors. Anyone who wants to invest in stocks or futures contracts should take into consideration the primary differences in how these investments are taxed. This guide is going to discuss the main tax benefits of trading futures over stocks.

How are Stocks Taxed?

The tax system used for stock investments is quite simple; you only pay tax on any profits you make. This is known as a capital gains tax, and the rate you pay depends on which tax bracket you fall into. If you fall into the 10% or 15% tax bracket, for example, you would pay 0%.