We have a 1099-B reflecting total -$175K aggregate loss (line 11) for Regulated Futures Contracts. Majority is realized (line 8 of -$174K and the rest is unrealized loss (line 10) of -$1K. We are reporting the -$175K loss on form 6781 and are not checking any straddle elections as they do not apply. I understand from reading Publication 550, that we can take the 1256 contracts loss election. However, there are some nuances that are not clear to me. My questions are reflected in bold.
Publication 550 says the following: "An individual having a net section 1256 contracts loss (defined later) can generally elect to carry this loss back 3 years instead of carrying it over to the next year. The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year.
The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts.
If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss.
This loss is the lesser of:
The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or
The capital loss carryover to the next tax year determined without this election.
In the first prior year (2021), we reflected $100K aggregate profit (line 11 which was all realized) from our 1099-B on Form 6781. We had less than $1K profit on form 6781 in 2020 and about $4K profit on form 6781 in 2019. However, on line 7 of our 1040 we reflected overall $3K capital loss from prior year capital loss carry forward. for both 2019 & 2020. We also already filed amended return for 2020 for another reason (and has current issue due to IRS input type error which I won't get into).
My first question is how much of our 2022 1256 contract loss can I carry back to 2021? We obviously would like to carry back as much as possible to 2021 tax return. In the definition of 1256 contract loss, I'm not sure if the 2nd bullet implies taking into consideration other non 1256 capital gains? In our case we do have some other capital gains which results in our overall capital loss of -$160K. In our 2021 return we also had some other non 1256 contract capital gain for overall capital gain of $130K. Please clarify if/how other non 1256 contract capital gains come into play here?
My next question is if it is possible to carry back some of the 2022 1256 contract loss to 2019 and skip 2020? So in essence carry back to years 2021 and 2019? Based on clarification of other non 1256 contract capital gains, it may not even be possible to carry back to 2019 or 2020.
My last question is what process is better to use for carrying back the loss to 2021, using 1040-X process or using Form 1045 process? What are the pros/cons to each process and can either of them be done using TurboTax software?
We will obviously have large capital loss carry forward which will take a long time to burn down at $3K/year. Are there any alternatives we should look into or is this basically only choice?
