what is form 6781 gains and losses from section 1256 contracts and straddles 
form 6781 gains and losses from section 1256 contracts and straddles is used to report gains and losses from straddles or financial contracts that are labeled as section 1256 contracts a straddle is a strategy that involves holding contracts that offset the risk of loss from each other for example if a trader buys both a call option and a put option for the same investment security at the same time they have formed a straddle 12most options and futures traders will need to use this form when they complete their taxes each year for reported investments 40 of the gain or loss is reported as short term and the remaining 60 is reported as long term 1who can file form 6781 gains and losses from section 1256 contracts and straddles individual tax filers must report gains and losses for contracts according to mark to market rules form 6781 has separate sections for straddles and section 1256 contracts so investors have to identify the specific type of investment used 1section 1256 contracts include regulated futures contracts foreign currency contracts options dealer equity options or dealer securities futures contracts these investments are considered to be sold at year end even if the positions are not actually closed for tax purposes they are assigned their fair market value in order to determine gains and losses 3for example assume a trader bought a regulated futures contract on may 5 2019 for 25 000 at the end of the tax year they still have the contract in their portfolio valued at 29 000 this trader s mark to market profit is 4 000 the trader reports this on form 6781 treated as 60 long term and 40 short term capital gain on jan 30 2020 the trader sells their long position for 28 000 since they ve already recognized a 4 000 gain on their 2019 tax return the trader will record a 1 000 loss calculated as 28 000 minus 29 000 on their 2020 tax return treated as 60 long term and 40 short term capital loss investors report gains and losses for straddles and section 1256 contract investments by using form 6781 but hedging transactions are treated differently since section 1256 contracts are considered to be sold every year the holding period of the underlying asset does not determine whether or not the gain or loss is short term or long term all gains and losses on these contracts are considered to be 60 long term and 40 short term in other words section 1256 contracts allow an investor or trader to take 60 of the profit at the more favorable long term tax rate even if the contract was only held for a year or less 1form 6781 gains and losses from section 1256 contracts and straddles require that investors trading foreign securities contracts in foreign exchanges report gains or losses from that contract on form 6781 even if those contracts would generally not be treated as a section 1256 contract 1