Question: What does "Section 1256 contract net losses can be carried back three years" mean?

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@VAer wrote:
Particularly I don't understand "carried back...".

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Carried back simply means you can use the net loss in a prior tax year (i.e., you amend your prior return to include the net loss).

For Section 1256 contracts, that would be up to three prior tax years starting with the earliest tax year in which you have a net Section 1256 gain (i.e., the net loss carryback can only offset 1256 net gains). 

amend prior return?

Let us say, I buy and sell Index Option in 2021 and there is Section 1256 loss, all transactions are done in 2021, can I still amend prior return? I feel like it has nothing to do with prior return.

Thanks.

Yes, you are allowed to amend a prior return (up to three prior years back) to carry back the net loss.

Note that you have to have a net 1256 gain in one or more of those years. 

Oh, if I just begin trading Index Option this year and had no traded any section 1256 contracts, then there is no need to amend prior return.

In this case, if I have section 1256 contract loss in this year, but no 1256 gain (or absolute no 1256 transaction) in prior three years, how about this year's 1256 loss? There is no way to carry over to future years?

Another example: if I have $7000  section1256 loss this year and $9000 capital gain this year, can I deduct all $7000 from the $9000? So that I only need to pay tax on $2000 capital gain?

Another example: If I have $7000  section1256 loss this year and no other capital gain, but I have W2 salary income, how much can I deduct section 1256 loss? Is it also $3000 per year (just like capital loss)?

Thanks.

Yes, you can certainly carry any unused loss forward to future tax years. 

With respect to net capital losses, you can use up to $3,000 to offset all of your other income and, of course, capital gains and losses within the same tax year are netted. 

Thanks. Let me be perfectly clear: for section 1256 contract loss, it not only can be carried forward to future year (just like regular capital loss), but also can be carried back three years (if there is section 1256 gain in those three years, just amend that year's return which has section 1256 contract gain, ignore the years which do not have 1256 gain). Is it correct statement?

Another question: If I have section 1256 loss this year and if I have section 1256 gain in last 3 years. If I don't amend the prior returns, can I just carry all section 1256 loss to future years (offset future capital gain)?

Thanks.

@VAer Both of your statements are correct (questions answered in the affirmative).

the net 1256 losses that can be carried back is limited to lesser of the net 1256 losses for the year or your net capital losses for the year reduced by any capital loss deduction.

$50,000 1256 losses for 2020

$30,000 other capital gains

net capital loss $20,000

allowable capital loss deduction $3,000

1256 loss that can be carried back $17,000

40% must be treated as short-term and 60% as longterm 

or

$50,000 1256 losses for 2020

$2,000 other capital losses

net capital loss $52,000

allowable capital loss deduction $3,000

1256 loss that can be carried back $49,000

40% must be treated as short-term and 60% as long-term 

the amount that can be used in a carryback year is the lesser of net Section 1256 gains or net capital gains. 

the carryback cannot create or increase a net operating loss. 

"the amount that can be used in a carryback year is the lesser of net Section 1256 gains or net capital gains"

It can be carried back for previous net capital gains too? So Section 1256 loss is not limited to carried back to offset previous section 1256 gain itself? 

Thanks.

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@VAer wrote:

It can be carried back for previous net capital gains too? So Section 1256 loss is not limited to carried back to offset previous section 1256 gain itself? 

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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.

See https://www.irs.gov/pub/irs-pdf/f6781.pdf

Form 6781 says "Corporations, partnerships, estates, and trusts are not eligible to make this election." (referring to section 1256 carry back.)

So if I read this right, lets say a complex example assumes approx $12,000 in 1256 losses for 2020 with about 7,000 of that in a trust, AND 2019 has less than 4,000 of non-trust 1256 gains, then it sounds like one could choose to do one of the following:

- take the time to amend 2019 with applicable 1256 loss amounts from 2020, and carry forward the rest (including amounts in a trust(?)), or

one could say to one's self "self, it ain't worth the time" and just carry forward the losses (albeit 3K per year), which would include all 1256 losses including those in a trust account(?)

It would be interesting to hear other opinions on this, particularly if I am right in using non-applicable 1256 carry back gains as carry forward losses, and if my trust/non-trust delineations are correct, and finally if one thinks it would be worth one's time.

don't even think about trusts, they are not eligible for NOL carryback.

Whether it is worthwhile to self depends on whether self wants that potential refund of tax in a prior year.

If you look at what's involved it's a complex calculation and the tax software won't do it for you.

If you make a mistake you will be looking at an IRS audit.

Thanks for replying, fanfare!  Appreciate it.

Yeah, It was pretty clear trusts don't apply. I tried to indicate I was aware of that situation in my first sentence, and referring to "applicable amounts" later on.  And thanks for the heads up on TT not doing the calculations; yet another reason for one to think long and hard if they really want to open up the last three years of tax returns (one must go to the oldest return first, if I read the rules right.)

If you multiplied my examples by 10 or 100, I can see it possibly being worth the time, but if I had a situation like that, I would probably just pay a CPA do the work for me.

I'm curious as to if the TT Live CPAs are versed in complex situations like these.  I imagine real estate or business scenarios could get gnarly as well.

> Another question: If I have section 1256 loss this year and if I have section 1256 gain in last 3 years. If I don't amend the prior returns, can I just carry all section 1256 loss to future years (offset future capital gain)?

I've run into this situation, and want to further clarify something. My tax firm (Dallo Law) said that Section 1256 losses must first be carried back three years in order, and only the unused amount that is not absorbed in years -3 and -2, can be applied to year -1 (previous year). So you can't apply all the Section 1256 loss to the past year, if you've had losses in the two years before it.

you can't apply all the Section 1256 loss to the past year, if you've had gains in the two years before it.

the carryback is an election you can make by checking the box on form 6781

it is an election, not a requirement. first net 1256 current year losses must be used to offset any current year capital gains (or it adds to other current year capital losses).   if you still end up with a net capital loss, it becomes a carryforward unless there is computed a remaining 1256 loss which you can elect to carryback.  2020 would go back to 2017 but read the rules on the form for the amount that can be used in 2017. any remaining loss goes to 2018 then 2019 and if there's still a loss remaining it goes forward to 2021 

here's the link to the federal form which also has the instructions. the one about the carryback starts on page 2. 

notice the IRS terminology "can elect"

https://www.irs.gov/pub/irs-pdf/f6781.pdf

this is from IRC code section 1212

(c)Carryback of losses from section 1256 contracts to offset prior gains from such contracts
(1)In general
If a taxpayer (other than a corporation) has a net section 1256 contracts loss for the taxable year and elects to have this subsection apply to such taxable year, the amount of such net section 1256 contracts loss—

I'm saying your tax firm is wrong if that's what they told you. 

first, current year 1256 losses must be used to offset other current year capital gains. if you still have a capital loss it's a carryforward.

Hi, If you have a 1256 contract loss in 2020 and there were NO years in the previous 3 years to carry back too that had a 1256 gain?

1.  How many years could you carry a 50k loss forward?  Is there a limited number of years carry forward for 1256 contracts for the loss carry forward?   The wording is a little tricky like it might be 1 year or limited.

2.  Can it be offset 60/40 on the normal 3000 capital gains loss?

3. Can 1256 losses be offset with regular stock gains (non 1256) on 1256 carry forwards or only 1256 gains and is the 3000 yearly loss an exception to this?

* I really appreciate the clarifications.   Carry backs are confusing but the wording of the carry forward is not written very clearly beyond year 1 for 1256 contracts and I don't see many google hits on it.   This is a very nice thread with good discussion.

You will report on 6781 but also on Schedule D where the usual rules for loss carryforward apply.

Better luck this year.

Is there a limit how many years you can carry a 1256 loss that is not used up forward?

Can you offset it against gains in a future year and take the standard 3k deduction?

if you don't make the carryback election the 1256 losses turn into regular capital losses that can be used in future years to offset capital gains even those not from 1256 contracts.    losses carry forward to the year you die.

Even if you dont have trader status at the time of the loss or in the future?  I figure it would have to offset 60/40 on the carry forward.

Also can you do a gain offset and the 3 k loss in the same year on 1256 losses?

If you are a professional trader, using MTM, your losses go on Form 4797, not on Schedule D. There is no carry-forward.

Hello all,

2021 (last year) - I did well with Section 1256 Contracts. It was my first year at it (i.e. no prior trading of these contracts in 2020 or earlier).

This year (2022) has been brutal for me. I'll rack up 1256 losses for sure. 

Just so I understand the mechanics: Once I'm done with my 2022 tax prep, I take whatever losses on Sec 1256 that are left - and Amend the 2021 return. File both together (I assume the sequence of filing is not important - but I'll first file 2022, then the amended 2021).

That's it? OR am I missing something? E.g., do I have to indicate on my 2022 return, in anyway, that I'm doing a loss carry-back to my 2021 return?

TIA - but this carry back thing is bit of mental gymnastics for me.

-G