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

[dilidulu]

Would you mind checking the following example and help me understand if I can carryback 30,000 into 2021? TIA!

I started trading futures since 2021 with a 1256 contract net gain in 2021 and a net loss in 2022.

Assume:

2021: section 1256 net gain is 30,000 but total capital Gain or loss is -50,000. Only 3,000 is reported as capital loss and -47,000 is carried forward to 2022

2022: section 1256 net loss is -80,000 and total capital Gain or loss is -200,000. Only 3,000 is reported as capital loss of current year.

check box D for carryback: 2021 is the first year trading so that's the only carryback year.

carryback limit: 30,000? what I'm struggling with is the smaller of section 1256 gain and schedule D line 16 gain as it's a loss of 50,000. 

[john9yao]

Here is from Form 6781 instruction:

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.

So I suggest you to check your 2021 return, use the GAIN number on Sched D, line 16 as your carryback amount.

[GeorgeM777]

It doesn't appear as if you can carryback your Section 1256 loss as in the example you have provided, it seems you net losses for both 2021--the first year you started trading futures--and 2022.  It is true that Section 1256 losses can be carried back but cannot be an offset against ordinary income.  The IRS provides the following information as to what you can carryback and how much:

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. 

Here is a link to the above information:

Gains or Losses_Section 1256

Also, the carryback is allowed only to the extent it doesn’t increase or produce a net operating loss for the carryback year. The loss is carried to the earliest year first. 

@dilidulu 

[dilidulu]

thanks but I don't have a overall gain 

[dilidulu]

Thank you. I guess I couldn't

[john9yao]

You can carryback to 3 years.  So you have a carryback on your 2022 return, you can apply it to 2019, 2020 and 2021, i.e. you want to carryback max to the sum of all 3 years' gain.  Note, you need to do 1040X for 2019 first, then 2020, and 2021 last.

[gyaqwe]

@DianeW777 , @DawnC , @john9yao - Thanks for your questions / guidance so far.

Could you please provide some pointers here: 

Background: 

I just filed my 2022 Taxes. Net Section 1256 losses of $5k. I did indicate on Form 6781 on 2022 returns that I will carry back $5k losses to 2021.

Also - 2021 was the first year for me with Section 1256 trades. (nothing in 2019 or 2020). Additionally 2021 Section 1256 was profitable (in excess of $10k).  No other cap gains / losses.

So now, I'm trying to re-cap steps I need to take for the carry back :

1. File form 1045 (do it do this for 2021 or 2022)?

2. Amend returns for 2021, which should create 1040X for 2021. Here I'm confused about how this works:

       - Is there a specific place I put in, on the 2021 Form 6781, that I'm bringing -$5k from 2022?

       OR

       - Do I just go about entering the totals (NET) inclusive of the 5k loss in the 2021 Form 6781, box 1C?

       OR

       - Is there something else I need to do?

Lastly, do I have to do both (1) and (2) above? Or do I need to do only one of those 2 steps?

TIA!

-G

[GeorgeM777]

Question 1 - You can prepare and file Form 1045, Application for Tentative Refund, on or about the time you submit your 2021 amended tax return.  Please note that TurboTax does not support Form 1045.  TurboTax instructions provide that taxpayers should go the the IRS website, download Form 1045, fill it out, and then mail it to the appropriate IRS office.  The IRS instructions for Form 1045 provide that you should mail Form 1045 in a separate envelope and not include it with your return.

Question 2 - No, when you are ready to amend, you can access your previously filed return, in TurboTax online, from the TurboTax home page. Scroll down the screen to the section Your tax return & documents.  If you have used TurboTax CD/download, then you can amend your previously filed return by selecting Other Tax Situations, and then scroll down to Other Tax Forms. 

Here is a link to a TurboTax article that explains in greater detail the process to amend a previously filed return.  How to Amend my Federal Tax Return for a Prior Year

After you begin to amend your 2021 return, TurboTax will ask you to respond to questions relating to what you are changing.  Because you are amending your 2021 return to add the carryback loss, you are changing the adjusted gross income you reported for 2021.  Continue through the application.  

@gyaqwe 

[Kauaiboy]

I have sizeable Sec 1256 Losses that I plan to carry back to 2019 and will be fully offset by that year.  I've spoke to an EA and a CPA on TT online and as noted here TT does not support Form 1045 Tentative Refund.  I read the 1045 Instructions multiple times and there is NOTHING about how to complete Form 1045 for Section 1256 Carryback losses.  There is a Schedule A to complete and it does not apply to 1256 carrybacks.   Thus anyone advising others to complete Form 1045 for 1256 carrybacks ought to think twice as I see it as complete waste of time if not a dead-end.   Form 1045 is guided by Pub 536: Net Operating Losses for Individuals.  Pub 536 also has no mention of Section 1256 Contracts being eligible...not a word in the entire Document.  Going through the form, I don't see how Form 1045 can be used for 1256 Carry-backs or Carry-forwards.

According to TT CPA and Pub 536 Page 5,  I can elect to file a 2019 1040X instead of Form 1045.   Amended returns take quite a bit longer (6 mos+) vs 90 days for the 1045.   

According to Pub 536 page 5-6, under the header FORM 1040X - on page 6 says "one must attach a computation of your NOL, using form 1045,  Schedule A, and, if it applies, your NOL carryover using Form 1045.  when submitting the 1040X".   Is this for real?  I have tried to complete Schedule A - but it does not work for Section 1256 carrybacks.  I understand I will not get advice from TT on Form 1045.  But if Schedule A form is required for the 1040X and TT supports 1040X returns, then they should support Form 1045 Sch A.   What am I missing?

Since there is NO instructions on how to complete 1045 for Section 1256 contract carrybacks AND I can't get in to see a CPA to do this within 3-4 months I will file the 1040X without Form 1045 Schedule A.   If anyone has actually done this I'd like to know what forms are needed to be successful.  Will a 2019 1040X with a revised 1256, and a revised schedule D be enough?  TIA.  Mahalo.

[phildonnia]

So, you understand what "carried forward" losses are.  

"Carried Back" is the same thing, but you claim the capital losses on an earlier year.  As you point out, you can claim $3000 capital loss against ordinary income each year.  So normally, if you have a $30k loss with no offsetting gains, then you may end up claiming that over ten years.  But Section 1256 losses can be carried back, as well as forward; so you can distribute some of the loss to years you've already done.

Presumably, you've already filed for the previous years; so you essentially amend the previous filings to include the carried back losses.  You usually file Form 1045 rather than 1040X for the previous years.

For example, if in 2022, you had a $30k loss, you could allocate $3000 each to 2021, 2020, and 2019, and either net those against gains or against ordinary income. You file Form 1045 for each of these years, and get a tax refund due to the decreased tax.  You would take $3000 against ordinary income for 2022, and then you have only $18k to carry forward.

That's the gist anyway.  There are lots of restrictions on how much you can carry back.  It's kind of an advanced move, so unless you have enormous losses in futures contracts, or feel like doing a lot of paperwork, maybe just leave the carryback at zero.  See the IRS instructions for Form 6781 for details.

[Kauaiboy]

Please re-read my post.  I should have posted a new question.   I understand everything about this topic except the completion of the forms.   Yes it’s a lot of carry back- 6 figure loss in 22  against a 7 figure gaiin in 2019.  
anyone here ever file form 1045 for a 1256 carry back?  

[Mike9241]

@Kauaiboy  you just have to know where to look for instructions. schedule A of 1045 is not required because you can not create or increase an NOL when you carryback at 1256 net loss. there is no requirement to use form 1045. it's preferred if more than one year is involved. form 1040-X for 2019 will serve just as well if the carryback will all be utilized in 2019 and there is no effect on 2020 (see warning below) .  

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from the FORM 6781 instructions

Make the election by checking box D (on form 6781 for 2022)  and entering the amount to be carried back on line 6. To carry your loss back, file Form 1045, Application for Tentative Refund, or an amended return. 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).

*********************************

here's from the instructions for 1040-X

Loss or credit carryback. File either Form 1040-X or Form
1045 to apply for a refund based on either an overpayment of tax
due to a claim of right adjustment under section 1341(b)(1) or
the carryback of a net operating loss (but see Net operating
losses below), a foreign tax credit, an unused general business
credit, or a net section 1256 contracts loss.

***************************************

warning. while the instructions only mention form 6781 and schedule D in fact you must attach all forms and schedules that change that affect the revised tax figure. For example, if charitable contributions were near the limit for 2019 the c/b would reduce the allowable amount. this then would result in a contribution carryover so you would have to carry the disallowed amount forward to 2020 (or forgo any benefit). in such a case use of the 1045 is preferred. if you paid AMT and/or NIIT taxes those would likely change. an AMT change could affect the carryforward to 2020 and so on. a change in the NIIT tax would not affect any other years.

********************************************

the only reason to use 1045 is when multiple years are involved is that all the years and attachments go with 1 form rather than multiple 1040-Xs. With those there no guarantee that 2019 would be processed before 2020 even if you mailed them together. this could result in processing delays and even correspondence from the IRS.  as a trick you could use Turbotax to prepare a 1040-X for each year involved. Carefully transfer the numbers to the 1045 and keep the X's for your records.     

[Kauaiboy]

Mike9241 Mahalo for the form completion guidance.  In 2019 I did charitable contributions and AMT and NIIT so these will affect 2020.   I like your idea of using TT to prepare multiple years 1040X and transfer to 1045 and appreciate the warning about processing delays.  

Looking at the "what to attach" when submitting the 1045 the instr say to include AMTNOL (alt min tax net operating loss) or ATNOLD  (alternative tax net operating loss) calculation.  Is this calc part of the 1040x? - I'm hoping it might be attached to it.

This calc is in addition to 6251 Alternative Minimum Tax (original and revised) for each loss year.  

[Kauaiboy]

@Mike9241 

Mahalo for the form completion guidance.  In 2019 I did charitable contributions and AMT and NIIT so these will affect 2020.   I like your idea of using TT to prepare multiple years 1040X and transfer to 1045 and appreciate the warning about processing delays.  

Looking at the "what to attach" when submitting the 1045 the instr say to include AMTNOL (alt min tax net operating loss) or ATNOLD  (alternative tax net operating loss) calculation.  Is this calc part of the 1040x? - I'm hoping it might be attached to it.

This calc is in addition to 6251 Alternative Minimum Tax (original and revised) for each loss year.  

[Mike9241]

i'm not sure what you are doing but a rule for the 1256 carryback is that you can not create or increase an NOL as a a result of a 1256 c/b to that year.  I don't know if Turbotax will generate a computation of an AMT NOL but I wonder why you would have one for 2019,

do note that when you do 2019 amended the AMT c/o form 8801 form will change and that will need to be reflected when doing 2020. The NIIT tax is a year by year tax and so each year's should stand on its own but will probably be reduced due to lower income for each year.