Internal Revenue Code · 26 U.S.C.
§ 1256. Section 1256 contracts marked to market
Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).
Cite as 26 U.S.C. § 1256
At a glance
Read from the text, the source credit and the official notes. Not part of the law.
- Status
- In force
- Added
- August 13, 1981 by Pub. L. 97–34
- Last amended
- March 23, 2018 by Pub. L. 115–141
- Amendments
- 11 dated changes in the source credit
- Length
- 7 subsections · 2,608 words · about 11 min to read
- Defines
- 17 terms
- Cross-references
- cites 7; cited by 17 Code sections and 43 other regulations
- Regulations
- 2 issued under this section
The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.
For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.
The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.
An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.
An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.
For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.
Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate.
For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(k)(4)).
Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.
Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.
Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.
In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).
The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).
For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.
For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.
Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.
For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.
Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes.
The term “nonequity option” means any listed option which is not an equity option.
The term “listed option” means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange.
The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.
For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section.
The term “securities futures contract” has the meaning given to such term by section 1234B.
(Added Pub. L. 97–34, title V, § 503(a), Aug. 13, 1981, 95 Stat. 327; amended Pub. L. 97–354, § 5(a)(38), Oct. 19, 1982, 96 Stat. 1696; Pub. L. 97–448, title I, § 105(c)(1)–(3), (5)(A)–(C), Jan. 12, 1983, 96 Stat. 2385, 2386; Pub. L. 98–369, div. A, title I, §§ 102(a), (b), (e)(1), (5), 104(a), 107(c), (d), title VII, § 722(a)(2), July 18, 1984, 98 Stat. 620, 621, 623, 624, 628, 630, 972; Pub. L. 99–514, title XII, § 1261(c), Oct. 22, 1986, 100 Stat. 2591; Pub. L. 106–170, title V, § 532(b)(4), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)–(3)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649, 2763A–650; Pub. L. 107–147, title IV, § 416(b)(1), Mar. 9, 2002, 116 Stat. 55; Pub. L. 108–311, title IV, § 405(a)(2), Oct. 4, 2004, 118 Stat. 1188; Pub. L. 109–135, title IV, § 412(oo), Dec. 21, 2005, 119 Stat. 2639; Pub. L. 111–203, title XVI, § 1601(a), July 21, 2010, 124 Stat. 2223; Pub. L. 115–141, div. U, title IV, § 401(a)(176)(A), Mar. 23, 2018, 132 Stat. 1192.)
Terms defined here
Where the text says “the term … means”. Select a term to jump to its definition.
- dealer equity option § 1256(g)(4)
- dealer securities futures contract § 1256(g)(9)(A)
- equity option § 1256(g)(6)
- equity option § 1256(g)(6)(B)
- foreign currency contract § 1256(g)(2)(A)
- hedging loss § 1256(e)(4)(D)
- hedging transaction § 1256(e)(2)
- hedging transaction § 1256(e)(3)(A)
- listed option § 1256(g)(5)
- mixed straddle § 1256(d)(4)
- nonequity option § 1256(g)(3)
- options dealer § 1256(g)(8)(A)
- qualified board or exchange § 1256(g)(7)
- regulated futures contract § 1256(g)(1)
- securities futures contract § 1256(g)(9)(C)
- syndicate § 1256(e)(3)(B)
- unrecognized gain § 1256(e)(4)(E)
Regulations under this section
Treasury regulations (26 CFR) issued under § 1256
Cross-references
Computed from the citations in the text of Title 26 and 26 CFR.
This section cites 7 other sections
- § 1092 Straddles
- § 263(g) Capital expenditures
- § 1221(b)(2)(A) Capital asset defined
- § 461(k)(4) General rule for taxable year of deduction
- § 465(a)(1) Deductions limited to amount at risk
- § 1091 Loss from wash sales of stock or securities
- § 1234B Gains or losses from securities futures contracts
Cited by 17 Code sections
- § 162(f)(5)(A) Trade or business expenses
- § 263(g)(3) Capital expenditures
- § 461(i)(3)(B) General rule for taxable year of deduction
- § 475(c)(2)(F)(iii) Mark to market accounting method for dealers in securities
- § 530A(b)(3)(B)(ii)(II) Trump accounts
- § 988(c)(1)(D)(i) Treatment of certain foreign currency transactions
- § 1092(a)(3)(C)(ii)(II) Straddles
- § 1212(c) Capital loss carrybacks and carryovers
- § 1221(b)(1)(B)(i) Capital asset defined
- § 1223(7) Holding period of property
- § 1234(c) Options to buy or sell
- § 1234A(2) Gains or losses from certain terminations
- § 1234B(c) Gains or losses from securities futures contracts
- § 1258(d)(5)(A)(ii) Recharacterization of gain from certain financial transactions
- § 1281(b)(1)(E) Current inclusion in income of discount on certain short-term obligations
- § 1402(i)(1) Definitions
- § 4982(e)(6)(B) Excise tax on undistributed income of regulated investment companies
Cited in 43 regulations not issued under it
- § 1.162-21 Denial of deduction for certain fines, penalties, and other amounts.
- § 1.163(j)-2 Deduction for business interest expense limited.
- § 1.250(b)-3 Foreign-derived deduction eligible income (FDDEI) transactions.
- § 1.367(a)-2 Exceptions for transfers of property for use in the active conduct of a trade or business.
- § 1.446-3 Notional principal contracts.
- § 1.448-1T Limitation on the use of the cash receipts and disbursements method of accounting (temporary).
- § 1.448-2 Limitation on the use of the cash receipts and disbursements method of accounting for taxable years beginning after December 31, 2017.
- § 1.475(a)-4 Valuation safe harbor.
- § 1.871-15 Treatment of dividend equivalents.
- § 1.882-5 Determination of interest deduction.
- § 1.954-2 Foreign personal holding company income.
- § 1.987-1 Scope, definitions, and special rules.
- § 1.987-1T Scope, definitions, and special rules (temporary).
- § 1.987-3 Determination of section 987 taxable income or loss of an owner of a section 987 QBU.
- § 1.987-3T Determination of section 987 taxable income or loss of an owner of a section 987 QBU (temporary).
- § 1.987-14 Section 987 hedging transactions.
- § 1.988-1 Certain definitions and special rules.
- § 1.988-2 Recognition and computation of exchange gain or loss.
- § 1.988-3 Character of exchange gain or loss.
- § 1.988-5 Section 988(d) hedging transactions.
- § 1.1001-4 Modifications of certain derivative contracts.
- § 1.1061-4 Section 1061 computations.
- § 1.1092(b)-1T Coordination of loss deferral rules and wash sale rules (temporary).
- § 1.1092(b)-2T Treatment of holding periods and losses with respect to straddle positions (temporary).
Show 19 more
- § 1.1092(b)-3T Mixed straddles; straddle-by-straddle identification under section 1092(b)(2)(A)(i)(I) (Temporary).
- § 1.1092(b)-4T Mixed straddles; mixed straddle account (temporary).
- § 1.1092(b)-5T Definitions (temporary).
- § 1.1092(b)-6 Mixed straddles; accrued gain and loss associated with a position that becomes part of a section 1092(b)(2) identified mixed straddle that is established after August 18, 2014.
- § 1.1221-2 Hedging transactions.
- § 1.1258-1 Netting rule for certain conversion transactions.
- § 1.1362-2 Termination of election.
- § 1.1374-1A Tax imposed on certain capital gains.
- § 1.1400Z2(a)-1 Deferring tax on capital gains by investing in opportunity zones.
- § 1.1502-13 Intercompany transactions.
- § 1.1504-4 Treatment of warrants, options, convertible obligations, and other similar interests.
- § 1.6045-0 Table of contents.
- § 1.6045-1 Returns of information of brokers and barter exchanges.
- § 1.6045A-1 Statements of information required in connection with transfers of securities.
- § 1.7872-5T Exempted loans (temporary).
- § 4.954-2 Foreign personal holding company income; taxable years beginning after December 31, 1986.
- § 5c.1305-1 Special income averaging rules for taxpayers otherwise required to compute tax in accordance with § 5c.1256-3.
- § 31.3121(v)(2)-1 Treatment of amounts deferred under certain nonqualified deferred compensation plans.
- § 31.3406(b)(3)-2 Reportable barter exchanges and gross proceeds of sales of securities, commodities, or digital assets by brokers.
Amendment history
From the source credit and the official notes, newest first.
- Amended by Pub. L. 115–141Parts changed in 2018: (e)(3)(B)
- Amended by Pub. L. 111–203Parts changed in 2010: (b)
- Amended by Pub. L. 109–135Parts changed in 2005: (f)(1)
- Amended by Pub. L. 108–311Parts changed in 2004: (g)(6)
- Amended by Pub. L. 107–147Parts changed in 2002: (f)(5)
- Amended by Pub. L. 106–554Parts changed in 2000: (b) (f)(4) (g)(6) (g)(9)
- Amended by Pub. L. 106–170Parts changed in 1999: (e)(2)
- Amended by Pub. L. 99–514Parts changed in 1986: (e)(4)
- Amended by Pub. L. 98–369Parts changed in 1984: (a)(1) (b) (c)(1) (c)(2) (c)(2)(A) (c)(2)(B) (d)(1) (d)(4)(B) (e)(2)(C) (e)(5) (f)(3) (g) (g)(1)(A)
- Amended by Pub. L. 97–448Parts changed in 1983: (b) (c) (d)(4)(B) (e)(3)(C)(v) (g)
- Amended by Pub. L. 97–354Parts changed in 1982: (e)(3)(B)
- Added by Pub. L. 97–34
Where it sits in the Code
- Subtitle A Income Taxes
- Chapter 1 NORMAL TAXES AND SURTAXES
- Subchapter P Capital Gains and Losses
- Part IV SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
Nearby sections
- § 1252 Gain from disposition of farm land
- § 1253 Transfers of franchises, trademarks, and trade names
- § 1254 Gain from disposition of interest in oil, gas, geothermal, or other mineral properties
- § 1255 Gain from disposition of section 126 property
- § 1256 Section 1256 contracts marked to market
- § 1257 Disposition of converted wetlands or highly erodible croplands
- § 1258 Recharacterization of gain from certain financial transactions
- § 1259 Constructive sales treatment for appreciated financial positions
- § 1260 Gains from constructive ownership transactions
Official notes
The Law Revision Counsel's notes for this section (amendments, effective dates and related laws) are long, so they have their own page.