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mecklovin
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E*Trade Morgan Stanley is the only Online Broker to classify SPY Option as 1256 Contracts.

For our 2023 1099 Forms, E*Trade classified equity options on SPY (S&P500 ETF ) as 1256 contracts in our 1099 Tax forms. 1256 contracts are marked to market yearly, and as well subject to a 60% LT Capital Gains / 40% Short Term Capital Gains Treatment split. 


Our interpretation is that SPY is an ETF issued by State Street that should track the SPX Index (S&P500) but is not obligated to. In times of stress, we have seen equity ETFs diverge from their respective indices. Therefore, it should be an equity not an index. This is how every other online broker (TD, Merrill Edge, IB, etc) has classified SPY options, as well as guidance from tax experts online. We only care how it's classified because we don't want to file an incorrect tax return and then get audited by IRS a few years down the line. 

 

Linking below a Reddit chain that also highlights the problem:

https://www.reddit.com/r/options/comments/176xp92/nobody_expects_the_section_1256_inquisition/

 

We have of course brought this up to E*Trade's attention, but they generally provide boilerplate response "I researched your question and Morgan Stanley is aware of the SPY options reporting as 1256 contracts."

 

In this case, what should we do in Turbo Tax? (last few years we have used the automatic upload) File according to the E*Trade 1099-B by entering SPY options as 1256 Contracts? Or should we manually input any SPY trades as we would any other ETF contracts. How would we input into Turbo Tax 2023 if we do not agree that SPY options are 1256 Contracts? Is it in our best interest just to follow the 1099-B from E*Trade even if we know it's incorrect, since we can always claim we were following a 1099 form if IRS ever comes back to us? Lastly, is there anyway to escalate this to IRS in the hope they would publish a document that helps classify 1256 contracts?

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