Net §1256 contracts loss election

M2M trader  MTM trader 

When you have a capital loss the procedure for netting capital gains and losses generally works as follows:

1. Net all of your §1256 gains and losses for the year (generally these are your Commodities or Futures trades).
2. Split the amount from #1 with 40% going to short-term capital gains or losses and the remaining 60% to long-term.
3. Combine and net the above short-term gains and losses with all of your other short-term gains and losses (including any short-term loss carry forward amount from the previous year).
4. Combine and net the above long-term gains and losses with all of your other long-term gains and losses (including any long-term loss carry forward amount from the previous year).
5. If either #3 and/or #4 shows a net loss, then combine and net the resulting short-term amount against the long-term amount.
6. If the result of #5 is an overall loss then you should deduct up to $3,000 of the loss against ordinary income per year.
7. Carry over any remaining losses in excess of the $3,000 to future tax years (also carry over any portion of the amount from #6 that was not utilized because you had a negative AGI).

Optional net §1256 contracts loss election:

Using IRS form 6781 a taxpayer may elect to carry back three years an amount of capital losses in excess of $3,000 from §1256 contracts.  The carried back losses may generate a tax refund by being offset against §1256 contract gains in that 3^rd year, with any remaining net loss coming forward year-by-year.

¹ Generally for individuals that means no later than April 15th for the year of the election (i.e. after the beginning and before the end of the year for which M2M takes effect).  For most corporations that means no later than March 15th for the year of the election. For new taxpayers, those who have not previously filed an income tax return (such as a newly formed multi-member LLC, for example) then that means #1 preparing the actual election statement no later than 2 months and 15 days after the entity's formation and #2 to notify the IRS that the election was timely made, the new taxpayer must attach a copy of the statement to its original federal income tax return for the election year (after the end of the first year).

² In limited situations the §475(f) election may be revoked with the consent of the Secretary under §475(f)(3).
If a separately filing entity has made the election - in lieu of revocation the owners may simply stop using the entity, liquidate it or dissolve it.