Section 1256 contracts is a term used by the IRS to classify certain types of investments. Some examples of Section 1256 contracts are regulated futures contracts, foreign currency contracts, or non-equity options.
Go to this section in Credit Karma Tax: Form 6781 - Elections
A futures contract is a contract where you agree to buy or sell a certain amount of a commodity at a fixed price to be delivered and paid for at a future date.
A straddle occurs when you make offsetting positions on personal property that are actively traded.
When do I need to report Section 1256 contracts or straddles?
Investments in contracts or straddles have different reporting requirements than other types of investments.
If you hold a Section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year and report the gains or losses on your tax return.
Capital gains or losses on Section 1256 contracts, whether open at the end of the year or terminated during the year, are treated as 60% long term and 40% short term, regardless of how long the contracts were held. There is an exception to this rule: if you properly identified a Section 1256 contract as a hedge at the time you entered into it, then you must treat any realized gains as ordinary income.