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

[fanfare]

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

[Mike9241]

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. 

[Mike9241]

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.

[AZtaxquestions]

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.

[fanfare]

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

Better luck this year.

[AZtaxquestions]

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?

[Mike9241]

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.

[AZtaxquestions]

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?

[fanfare]

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

[gyaqwe]

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

[fanfare]

did you pay a lot of tax due to those gains in 2021?

if NO, then there's little point to carry back.

See 2022 Form 6781 Line 6 where you tell the IRS how much to expect on your amended return for prior year(s).

Since you started in 2021 that's the one year you can carry back to.

@gyaqwe 

[gyaqwe]

@fanfare Yes -  (by my standards), I paid a LOT of taxes. Section 1256 represented 20% of my income last year. Thank you for the specific line number on the form.

I'm actually liking Section 1256 contracts even more, now. This capability of clawing back some of the previously paid taxes is PHENOMENAL. 

Thanks mate!

[fanfare]

"Since you started in 2021 that's the one year you can carry back to."

I think this is so. I haven't looked at the Pub in detail lately.

So, double check to be sure you don't have to go back to third year, and second,

before taking an offset on prior year.

@gyaqwe 

[Mike9241]

1256 contracts are reported on form 6781. if you are going to do a carryback box D must be checked

the actual carryback has some limitations

your net 1256 loss for 2022 is the smallest of the following

1) the net 1256 losses reduced by $3000 ($1500 if married filing separate) what this means is that $3000 (or $1500) must be used against current year income 

 2) your capital loss carryover to 2023 if line 6 of form 6781 was zero.

the actual amount you can carryback is the smallest of 

1) the net gain from 1256 contracts for the carryback year

2) the net gain on line 16 of schedule D before any carryback.

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).

file 2022 first because the 2021 amended return can not be e-files and there's no telling how long the IRS will take to get to it. it could wait until the 2022 return is processed to make sure the amount you carryback is correct. expect the refund to take many months - for 2021 refunds some ops have reported delays exceeding 6 months from filing. 

for more info read the instructions for the form starting on page 2

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

[gyaqwe]

@Mike9241  Thanks a ton for the detailed response. I'm curious about the part where you've mentioned: 

...

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the actual amount you can carryback is the smallest of 

1) the net gain from 1256 contracts for the carryback year

2) the net gain on line 16 of schedule D before any carryback.

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I can still do a carry-back to multiple tax years, not just a single one, correct?

I wonder why more folks don't do Sec 1256 trading? So many benefits especially from a Tax standpoint

Thanks again!