In a recent op-ed, Warren Buffett made a claim about investment managers:
Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.
Now I thought capital gains required you to hold for a year and a day. What trick is Buffett referring to here?
A Section 1256 contract is any:
- Regulated futures contract
- Foreign currency contract
- Non-equity option
Non-equity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based upon the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index).
60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. What this means is a more favorable tax treatment of 60% of your gains.
https://www.tradelogsoftware.com/resources/filing-taxes/futures/
It's a really weird rule (arbitrary 60% designation, so broad, etc), but section 1256 contracts get preferential tax treatment and that's what Buffett's talking about.
