The Tax Thread

Why does the government give preferential tax treatment to futures? In other words, the 60/40 split encourages futures trading. Why does the government incentivize this product over others?

apsommer 

Why does the government give preferential tax treatment to futures? In other words, the 60/40 split encourages futures trading. Why does the government incentivize this product over others?

Because most futures are short dated hence you are continually rolling them. Hence holding period is almost always less than a year and everything would be taxed at the short term rate.

SMCJB 

Because most futures are short dated hence you are continually rolling them. Hence holding period is almost always less than a year and everything would be taxed at the short term rate.

I don't understand your comment. Futures are taxed at 60% long term, and 40% short term. In contrast, equities are 100% short term. The government is incentivizing futures trading with this preferential tax treatment. Why would they do that, and not treat futures as 100% short term like the other products?

apsommer 

I don't understand your comment. Futures are taxed at 60% long term, and 40% short term. In contrast, equities are 100% short term. The government is incentivizing futures trading with this preferential tax treatment. Why would they do that, and not treat futures as 100% short term like the other products?

equities are not 100% short term, unless you hold under a year. Over 1 year they become long term.

Back when this law was pushed through, Congress people in Chicago had a lot of power, and they put the 60/40 treatment into law to help the Chicago based futures industry.

apsommer 

I don't understand your comment. Futures are taxed at 60% long term, and 40% short term. In contrast, equities are 100% short term. The government is incentivizing futures trading with this preferential tax treatment. Why would they do that, and not treat futures as 100% short term like the other products?

As @kevinkdog said equity taxation depends upon how long you hold the security. In addition equities are only taxed upon closing the position while futures are taxed on mark-to-market gains.

If your point is that the taxation on day trading futures is better than day trading equities, then yes you are correct. But the flip side also applies in that the taxation of equities is better on long term trades.