Reporting Regulated Futures Contracts Loss

[Aussie]

We have a 1099-B reflecting total -$175K aggregate loss (line 11) for Regulated Futures Contracts. Majority is realized (line 😎 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.

[Mike9241]

the carryback must go to the third prior year  (2019)  first any left to the second (2020) and if any still left to 2021  - IRC 1212(c)

first you must figure what's available for carryback it's:

• Your net losses from section 1256 contracts  (line 5 of 6781)  - note there seems to be a conflict between the 6781 instructions, PUB 550 and code section 1212 (defines the rules for the 1256 loss election)  the 6781 says the net 1256 losses reduce by the the sum of the net 1256 gains + 3000 (other than MFS). Neither the code section or Pub 550 mention the $3K. and testing Turbotax no error pops up if I elect to c/b the full net 1256 loss for the year (say report $100K in loss and $50K in gains Turbotax allows the full $50K as a loss c/b. Instructions are unofficial so I would go by the code section. The rules only limit the max that can be carried back. A taxpayer able to carryback the full amount can choose to carryback less) 
• The total you would figure as your short-term and long-term capital loss carryovers to 2023 if line 6 of Form 6781 were zero. Use a separate Schedule D (Form 1040) and Capital Loss Carryover Worksheet (in Pub. 550) to figure this amount. generally this would be line 16 of schedule D reduced by the amount of capital losses used in 2022

the tentative amount that can be carried back from 2022 can not exceed the loss on line 5 of the 6781. Part II amounts, if any don't enter into it 

 the amount that can be used in any of the prior years is the smaller of (for purposes of these computations they're computed before the carryback) :

1) the net 1256 gain that would be reported on line 16 of schedule D (all other capital gains and losses are eliminated from the schedule. I can't see how this would differ from line 5 of the 6781 for 2021

2) the gain on line 16 of schedule D

the carryback is allowed only to the extent it doesn’t increase or produce a net operating loss for the carryback year.

since you're saying 2019 and 2020 had net capital losses there is no carryback to those years due to 2) above

To carry your loss back, file Form 1045, Application for Tentative Refund, or an amended return 1040 X. Attach an amended Form 6781 and an amended Schedule D (Form 1040) for the applicable years.
On the amended Forms 6781 for the years to which the loss is carried back, report the carryback on line 1 of that year’s amended Form 6781. Enter “Net section 1256 contracts loss carried back from” and the tax year in column (a), and enter the amount of the loss carried back in column (b).

by reporting the the c/b on the 6781 it will automatically split any remaining net 1256 gain  60/40

[Aussie]

I appreciate the response and while some of my questions are answered, I still need some clarifications.

It appears I am misinterpreting the Pub 550 statement "The loss is carried to the earliest carryback year first".

My initial thought was which year was soonest to the current year which would be 2021. I do see if you look at the 3 available years (2019, 2020 & 2021), 2019 is the earliest year so that makes sense.

I do see the inconsistency in loss calculations between form 6781 instructions and Pub 550 as it is silent on the $3K.  

Per Form 6781 instructions, "Your net section 1256 contracts loss is the smaller of:
• The excess of your losses from section 1256 contracts over the total of (a) your gains from section 1256 contracts plus (b) $3,000 ($1,500 if married filing separately), or
• The total you would figure as your short-term and long-term capital loss carryovers to 2023 if line 6 of Form 6781 were zero. Use a separate Schedule D (Form 1040) and Capital Loss Carryover Worksheet (in Pub. 550) to figure this amount. "

 In my case it appears it doesn't really matter how the loss is calculated as I am limited to how much I can carry back to prior 3 years due to "the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year" rule.  My loss is too big and will have to carry a portion forward to 2023 regardless.  For future reference if the numbers are closer together, what source is the gold standard for figuring this out since there are inconsistencies among the sources?

What does make a difference in my case is the max amount of loss I can carry back to 2021 since 2019 & 2020 have reported loss on schedule D line 16 for both years. Per 1256 instructions 'The amount you can carry back to any prior year is limited to the smaller of:
• The gain, if any, that you would report on line 16 of Schedule D (Form 1040) for that carryback year if only gains and losses from section 1256 contracts were taken into account; or
• The gain, if any, reported on line 16 of Schedule D (Form 1040) for that carryback year.

I agree in I don't see any difference in the amount that would be calculated in the 1st bullet vs line 5 of form 6781. In my case my 2021 tax return reflects a higher amount on line 16 of schedule D than line 5 of form 6781 so it appears I am limited to carry the loss from 2022 to only the amount reflected on line 4 of form 6781.  For example if my line 16 on schedule D in 2021 was $130K and line 5 of Form 6781 was $100K, I can only carry back $100K from 1256 contracts loss in 2022, correct? This will result in a wash for the section 1256 contracts gain reported in 2021 but still reflect small capital gain on line 16 of Schedule D due to other equity capital gains reported.

Which process is better to use to report the section 1256 contracts loss carryback to 2021? Amend the 2021 tax return or file Form 1045? Are there any advantages/disadvantages to either process? Can both methods be filed in TurboTax without having to mail anything?

Is there any options to treat section 1256 contracts losses that have to be carried forward other than the typical limitation of deducting $3K loss per year for MFJ returns?