1256 Contract
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A 1256 Contract, as defined in section 1256 of the U.S. Internal Revenue Code, is any regulated futures contracts, foreign currency contracts, non-equity options (broad-based stock index options (including cash-settled ones), debt options, commodity futures options, and currency options), dealer equity options, and any dealer security futures contracts.[1][2] For U.S. Federal income tax purposes, mark-to-market accounting is used for each 1256 contract as of the end of each tax year,[3] and such contracts are treated as sold for its fair market value on the last business day of such taxable year (i.e., as "closed").[4]
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The Internal Revenue Service (IRS) is not clear on whether QQQ, DIA and SPY options should be treated as section 1256 contracts.[5] On one hand, these are seen as equity options, not within the definition of a 1256 Contract, but others consider them as non-equity option and meeting the definition of a "broad-based" index option.[6] Instead, the IRS grants penalty relief if a broker determines in good faith that an index is, or is not, a narrow-based index, following published guidelines.[6]