Taxation of Income & Loss from Trading of Futures & Options (2024)

FAQs

Taxation of Income & Loss from Trading of Futures & Options? ›

Taxation here is relatively straightforward. The IRS applies what is known as the 60/40 rule to all non-equity options, meaning that all gains and losses are treated as: Long-Term: 60% of the trade is taxed as a long-term capital gain or loss. Short-Term: 40% of the trade is taxed as a short-term capital gain or loss.

Any income or loss that arises from the trading of Futures and Options is to be treated and considered as business income or business loss. As such, the ITR-4 tax form would be required by the taxpayer to file his or her returns.

How Are Options Taxed? If an equity option is a short-term capital gain or loss, it is taxed as income. If it is long-term, gains and losses are taxed as capital gains.

Capital Losses AdvantagesSimilar to stock trading, futures traders can deduct up to $3,000 in capital losses from their annual income as long as losses outweigh the gains for the year. However, the 60/40 rule also applies to capital losses incurred from futures trading.

If you are trading in Futures and Options, you should get your accounts audited if your turnover is more than ₹10 crore. You can also apply a presumptive taxation scheme if your turnover does not exceed ₹2 crore and declare that your taxable income is at 6% of the total Futures and Options turnover.

Tax Loss Carryovers

If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.

Risk management is crucial in futures trading to minimize losses and keep you trading. Fundamental principles of risk management include setting stop-loss orders and diversification. Risk management strategies involve position sizing, technical analysis, and monitoring market conditions.

Set Off Profits Against Previous Losses

Unfortunately, if you suffer a net loss from your F&O trading by the year end, you can carry forward your losses for up to 8 years, which can be adjusted against your future profits, which reduces your tax liability in the year of adjustment.

Stock options are typically taxed at two points in time: first when they are exercised (purchased) and again when they're sold. You can unlock certain tax advantages by learning the differences between ISOs and NSOs.

You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.

What is the 60 40 rule for futures? ›

Futures, forex, and options

Section 1256 contracts get special tax treatment of 60/40. This means that positions held for any amount of time will receive 60% long-term capital gains treatment and 40% short-term capital gains treatment.

Futures and Options on Futures

Your Futures 1099-B will list your Aggregate Profit or Loss from futures trading. Similar to cash-settled index option, the number you need to report is your Aggregate Profit or Loss (line 11), as illustrated below.

The IRS applies what is known as the 60/40 rule to all non-equity options, meaning that all gains and losses are treated as: Long-Term: 60% of the trade is taxed as a long-term capital gain or loss. Short-Term: 40% of the trade is taxed as a short-term capital gain or loss.

Non-equity options taxation

60% of the gain or loss is taxed at the long-term capital tax rates. 40% of the gain or loss is taxed at the short-term capital tax rates.

Mark-to-market (MTM) accounting:

At the end of each trading day, the gains or losses on open positions are calculated based on the closing prices of the contracts. This is known as the mark-to-market settlement. Here, the profits and losses are realized daily in the form of cash adjustments.

ITR-3 for Business Activities: For individuals and Hindu Undivided Families (HUFs) who carry out F&O trading as a business activity, ITR-3 is the appropriate form. This form is designed to account for business-related income and losses, including those incurred through F&O trading.

Futures, forex, and options

Have you traded futures, foreign exchange, index options, or any products that are marked-to-market? If so, you'll need to file Form 6781, Gains and Losses Form Section 1256 Contracts and Straddles.

F&O losses are incurred from trading in derivatives, specifically futures and options contracts. For Income Tax Return (ITR) purposes, F&O losses are considered non-speculative business losses. The tax implications of F&O losses in the Indian context are distinct from other types of investment losses.