EDUCATION CENTER
GTT RESOURCES: SECURITY FUTURES

Securities futures contracts (SFC)
(otherwise known as "single-stock futures")

Summary
The IRS labels the industry term "single-stock futures" as "securities futures contracts" (SFC). It is clear on the IRS Web site and from tax research, that single-stock futures (SFCs) are taxed like their underlying instruments, stocks (and not commodities).

The difference between a security (stocks and SFCs) and a commodity (futures, commodities, interbank FOREX):

The universe of trading instruments is growing every day, providing traders with many new opportunities for profits. Tax-wise, the IRS forces all these instruments into two main tax categories: "securities" or "commodities." Figuring out how to treat all the new products is a challenge.


For securities, business traders report capital gains and losses on Schedule D (default cash method) or Form 4797 Part II (if mark-to-market accounting is elected). Securities traders rarely hold positions for more than 12 months, so the bulk of their trading gains are short-term capital gains subject to the ordinary income tax rates.

For commodities, business traders report their capital gains and losses on Form 6781 (Section 1256 contracts). This allows them to split the gains and losses 60/40 on Schedule D: 60 percent long-term, 40 percent short-term.

This 60/40 split gives commodities traders an advantage over securities traders. For this reason, most profitable commodities traders don’t elect MTM IRC 475. With 475, commodities trader can have “tax-loss” insurance (ordinary loss treatment), but they are reluctant to give up their beneficial tax rates on gains (the 60/40 split).

Important Note: You may not see your SFC transactions listed in your Form 1099-B, the main section that your broker files with the IRS. Form 1099-B lists all your stock proceed transactions only. Even though a SFC is treated for tax purposes like its underlying instrument (a stock), for 2002 tax reporting, the IRS exempted brokers from this Form 1099-B reporting requirement, pursuant to IRS Notice 2003-8.

Form 1099s only report "proceeds on stock sales" and "aggregate profit or loss" on "section 1256 contracts" (futures and commodities, but not FOREX interbank transactions).

Most brokers attach a "supplemental information" report behind their Form 1099-Bs when they mail those reports to their clients. The supplemental information report often includes margin interest expense, purchases of securities, total stock option purchases and sales and we expect may also include SFC transactions.

Clients will have trouble figuring out their taxable gains and losses from these brokerage firm reports. We recommend our GTT TradeLog accounting software and our 2003 Guide: Accounting Gains and Losses. The important point for clients to understand is that just because you don't see a transaction listed on your Form 1099 doesn't mean you are not required to report and pay taxes on the omitted transactions.

IRS Web site explanation and tax treatment for a "securities futures contract."

Click here for information from the IRS Web site (An excerpt follows)

Securities Futures Contracts
A securities futures contract is a new financial product that is a contract of sale for future delivery of a single security or of a narrow-based security index. Gain or loss from the sale or exchange of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale or exchange of the contract will be considered short-term, regardless of how long you hold the contract. For more information, see chapter 4 of Publication 550, Investment Income and Expenses.

More information from the IRS Web site. Scroll down to:

Securities Futures Contracts (excerpt here)

"A securities futures contract is a contract of sale for future delivery of a single security or of a narrow-based security index.

Gain or loss from the contract generally will be treated in a manner similar to gain or loss from transactions in the underlying security. This means gain or loss from the sale or exchange of the contract will generally have the same character as gain or loss from transactions in the property to which the contract relates. Any capital gain or loss on a sale or exchange of a contract to sell property will be considered short-term, regardless of how long you hold the contract. These contracts are not section 1256 contracts (unless they are dealer securities futures contracts)."

Another excerpt from the IRS Web site:

Dealer securities futures contract. For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that:
Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option).

Is traded on a qualified board or exchange (as defined under Regulated futures contract, earlier.)

A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts.

Treatment of securities futures contracts gain and loss.
Gain or loss on the sale, exchange, or termination of a securities futures contract is treated as gain or loss from the sale or exchange of property having the same character as the property to which the contract relates has in the hands of the taxpayer (or would have if acquired by the taxpayer)¹

¹  Code Sec. 1234B(a)(1) . 

This rule doesn't apply to securities futures contracts that aren't capital assets under Code Sec. 1221(a)(1) (inventory assets), or Code Sec. 1221(a)(7) (identified hedging transactions), ² or any income derived in connection with a contract which would otherwise not be capital gain. ³

² Code Sec. 1234B(a)(2)(A) .

³ Code Sec. 1234B(a)(2)(B) .

Thus, if an underlying security would be a capital asset in the taxpayer's hands, the gain or loss from the sale or exchange of the securities futures contract is capital gain or loss. ⁴

⁴ Conf Rept No. 106-1033 (PL 106-554) p.1034.

Except as otherwise provided under the Code Sec. 1092 straddle rules, the short sale rules or these rules, capital gain or loss from the sale, exchange, or termination of a securities futures contract to sell property is short-term capital gain or loss. ⁵ Thus, a securities futures contract to sell property is treated in the same way as a short sale of the underlying property. ⁶

⁵ Code Sec. 1234B(b) .

⁶ Conf Rept No. 106-1033 (PL 106-554) p. 1034.

Before Dec. 21, 2000, ⁷ the above rules didn't apply.

⁷ Sec. 401(i), PL 106-554, 12/21/2000 ; Sec. 412(e), PL 107-147, 3/9/2002 .

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