Saving on taxes is all about planning and strategizing one’s investments, sales and expenses in order to qualify for deductions and credits. With that being said, it is very helpful for taxpayers to be aware of qualifying investments & expenses so they can be claimed future on tax returns. For example, were you aware that some investments will provide you with partial long term capital gain when only held for a day? IRC §1256 Gains can be a tax saving investment instrument, but what investments qualify? How is it useful for tax purposes?
To provide taxpayers a better idea about IRC §1256 Gains, here is an article on IRC §1256 Gains prepared by AG Tax analysts.
How do IRC §1256 Qualifying Gains Work
Gains from the sale of qualifying investments under the Internal Revenue Code (IRC) §1256 are treated partially as long-term and partially as gains, i.e. 60% of the gain is taxed at rates applicable on long-term gains, while 40% of the gains is taxed at short-term capital gains rate, even if the investment is held for just one month saving.
For example: If a U.S. taxpayer bought shares of a U.S. company at $10,000; and sold it off after a period of 2 months at $15,000. The short-term gain is $5,000.
Now, assuming an effective tax rate of 35%, the tax payable on this gain would be $5,000 X 35% = $1,750.
But, if this stock qualifies under §1256, the $5,000 short-term gain would be partially treated as long-term gain. The calculation would be as follows:
(40% of $5,000 X 35%) + (60% of $5,000 X 15%) = $1,150
Thus, based on the above example, a taxpayer can easily save $600 simply by choosing to invest in investment whose gains qualify as IRC §1256 gains.
Which Investments Qualify As IRC §1256 Gains
Gains from the following investments qualify as IRC §1256 Gains:
- Regulated futures contracts
- Foreign currency contracts
- Non-equity options
- Dealer equity options
- Dealer securities futures contract
How Does A Taxpayer Report IRC 1256 Gains & Losses For Tax Purposes
IRC §1256 gains are reported on IRS Form 6787: Gains and Losses from Section 1256 Contracts and Straddles, and also subject to Mark to Market (M to M) rules (i.e. on the last business day of the year the IRC §1256 gains qualifying investments are assumed to be sold at fair market value). This assumed gain (loss) is reported on the IRS tax form 1040 with the new cost basis being carried forward into the next tax year.
However, there are few other points associated with IRC §1256 investments that should be taken into consideration, such as: losses from IRC §1256 investments can be carried forward for up to three years if there have been IRC §1256 gains in the previous tax years, and Net Investment Income Tax or NIIT as the gains is considered passive income.
That being said this is just a brief overview of IRC §1256 gains and it is best to consult a tax professional to obtain more information regarding these investments and whether these investments suit the taxpayer’s tax plan or not now and for the future tax years as well.
AG Tax LLP Can Help
If you wish to know more about these investments or have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle even your most complex tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
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- Estate Planning, Inheritance tax advice
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