# Form 6781: Gains and Losses From Section 1256 Contracts and Straddles

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> **Definition**
>
> IRS Form 6781 is used to report gains and losses from Section 1256 contracts (such as futures) and straddles, which are transactions that comply with mark-to-market rules.

## What Is Form 6781: Gains and Losses From Section 1256 Contracts and Straddles?

Form 6781, Gains and Losses From Section 1256 Contracts and Straddles is used to report gains and losses from straddles or financial contracts that are labeled as Section 1256 contracts.

A straddle is a strategy that involves holding contracts that offset the risk of loss from each other. For example, if a trader buys both a call option and a put option for the same investment security at the same time, they have formed a straddle.

Most [options and futures traders](https://www.investopedia.com/ask/answers/12/difference-investing-trading.asp) will need to use this form when they complete their taxes each year. For reported investments, 40% of the gain or loss is reported as short-term, and the remaining 60% is reported as long-term.

### Key Takeaways

*   Form 6781, Gains and Losses From Section 1256 Contracts and Straddles is a tax form distributed by the Internal Revenue Service (IRS) that is used by investors to report gains and losses from straddles or financial contracts.
*   Form 6781 has separate sections for straddles and Section 1256 contracts.
*   Section 1256 contracts include regulated futures contracts, foreign currency contracts, options, dealer equity options, or dealer securities futures contracts.

## Who Can File Form 6781: Gains and Losses From Section 1256 Contracts and Straddles?

Individual tax filers must report gains and losses for contracts according to mark-to-market rules.

Form 6781 has separate sections for [straddles](https://www.investopedia.com/terms/s/straddle.asp) and [Section 1256 contracts](https://www.investopedia.com/terms/s/section-1256-contract.asp), so investors have to identify the specific type of investment used.

Section 1256 contracts include regulated [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp), foreign currency contracts, [options](https://www.investopedia.com/terms/o/option.asp), dealer equity options, or dealer securities futures contracts. These investments are considered to be sold at year-end (even if the positions are not actually closed) for tax purposes. They are assigned their [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp) in order to determine gains and losses.

For example, assume a trader bought a regulated futures contract on May 5, 2024, for $25,000. At the end of the tax year, they still have the contract in their portfolio valued at $29,000. This trader's mark-to-market profit is $4,000.

The trader reports this on Form 6781 (treated as 60% long-term and 40% [short-term capital gain](https://www.investopedia.com/terms/s/short-term-gain.asp)). On Jan. 30, 2025, the trader sells their long position for $28,000. Since they've already recognized a $4,000 gain on their 2024 tax return, the trader will record a $1,000 loss (calculated as $28,000 minus $29,000) on their 2025 tax return (treated as 60% long-term and 40% [short-term capital loss](https://www.investopedia.com/terms/short-termloss.asp)).

Investors report gains and losses for straddles and Section 1256 contract investments by using Form 6781, but hedging transactions are treated differently.

Since Section 1256 contracts are considered to be sold every year, the [holding period](https://www.investopedia.com/terms/h/holdingperiod.asp) of the underlying asset does not determine whether or not the gain or loss is short-term or long-term: all gains and losses on these contracts are considered to be 60% long-term and 40% short-term.

In other words, Section 1256 contracts allow an investor or trader to take 60% of the profit at the more favorable [long-term tax](https://www.investopedia.com/terms/l/long-term_capital_gain_loss.asp) rate even if the contract was only held for a year or less.

> **Important**
>
> Form 6781, Gains and Losses From Section 1256 Contracts and Straddles requires that investors trading foreign securities contracts in foreign exchanges report gains or losses from that contract on Form 6781, even if those contracts would generally not be treated as a Section 1256 contract.

## How to File Form 6781: Gains and Losses From Section 1256 Contracts and Straddles

Part I of Form 6781 requires Section 1256 investment gains and losses to be reported at either the actual price the investments were sold for or the mark-to-market price established on Dec. 31.

Part II of the form requires the losses on the trader’s straddles be reported in Section A and gains reported in Section B. Part III is provided for any unrecognized gains on positions held at the end of the tax year, but only has to be completed if a loss is recognized on a position.

You can download Form 6781 from the IRS.

[Form 6781: Gains and Losses From Section 1256](https://www.irs.gov/pub/irs-pdf/f6781.pdf)

## What Is an Options Straddle?

An options straddle is a trade where you buy both a call option and a put option with the same strike price and expiration date on the same stock. It's a way for traders to make bets on price swings without having to commit to one price direction; whether the stock price goes up or down, the trader can make money. However, if there isn't much change in the price, the trader can lose out on the trade due to the money they paid for the options. Options straddles work best when there are large price swings.

## What Does Mark-to-Market Mean?

Mark-to-market is a method of valuing an asset or liability based on its current market price rather than its original cost. The goal is to ensure financial statements reflect the real-time values of assets and liabilities. While this accurately assesses valuations on the books, it can lead to sharp fluctuations if the asset is volatile.

## Why Are Long-Term Capital Gains Better?

One of the reasons long-term capital gains are better than short-term capital gains is because they are taxed at lower rates. Capital gains on assets held for less than a year are taxed at ordinary income, which can be as high as 37% depending on the investor's tax bracket. Long-term capital gains, however, are taxed at either 0%, 15%, or 20% depending on the investor's tax bracket. This means the investor gets to keep more of their profits.

## The Bottom Line

Form 6781 is a necessary form for traders dealing with Section 1256 contracts and straddles, as it determines how their gains and losses are reported for tax purposes.

These contracts, which include futures, options, and certain foreign currency contracts are subject to mark-to-market rules, meaning they are sold at year-end regardless if they were actually closed.

This allows traders to classify their gains as 60% long-term and 40% short-term, which may lead to favorable tax treatment. The form ensures traders are properly recording their investment activity and complying with IRS rules.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles](https://www.irs.gov/forms-pubs/about-form-6781)."
>     
> 2.  Internal Revenue Service. "[Form 6781, Gains and Losses From Section 1256 Contracts and Straddles](https://www.irs.gov/pub/irs-pdf/f6781.pdf)." Page 1.
>     
> 3.  U.S. House of Representatives, Office of the Law Revision Counsel. "[26 USC 1256: Section 1256 Contracts Marked to Market](https://uscode.house.gov/view.xhtml?req=%28title:26%20section:1256%20edition:prelim%29)."
>     
> 4.  Internal Revenue Service. "[Form 6781, Gains and Losses From Section 1256 Contracts and Straddles](https://www.irs.gov/pub/irs-pdf/f6781.pdf)." Page 2.
>     
> 5.  Internal Revenue Service. "[Form 6781, Gains and Losses From Section 1256 Contracts and Straddles](https://www.irs.gov/pub/irs-pdf/f6781.pdf)."
>     
> 6.  Internal Revenue Service. "[Topic no. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409)."