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On form 6781, I report my profits on stock index options. These profits are both realized and unrealized. Since these options are 1256, I must pay tax on my unrealized gains.

Both realized and unrealized gains are included on my lines 8 and 9. However, I am reporting unrealized gains on line 14. These gains are already included on lines 8 and 9. I do not want to report the gain twice. I do not think I am. Am I? As far as I can tell, line 14 on form 6781 is not an input to any other form.

My tax return was generated using Turbo Tax.

littleadv
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Bob
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1 Answers1

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Correct, line 14 is not an input to any other form. But note two things about line 14 (Part III of Form 6781): It is labeled "Memo entry only", and it asks for "unrecognized" (not "unrealized") gains. I would argue that your marked-to-market gains on 1256 positions held at year-end are recognized, since as you note, those gains are included in the lines that flow to Schedule D and you are paying tax on them.

Unrecognized gains are more to do with a non-1256 position that offsets (moves predictably inversely to) a position where a loss has been realized -- which does not seem to apply to your situation. Technically, this would be a non-identified straddle. To prevent manufacturing capital losses while deferring gains, such an unrealized and unrecognized gain is netted against the corresponding loss to determine how much (if any) of the loss can be recognized, i.e., used to reduce overall capital gains (see Part II-A of Form 6781). Then in a later year, if more of the gain is realized and recognized, more of the loss can be recognized as well.

See also a video by a CPA that illustrates completing Form 6781 based on a sample 1099-B that includes marked-to-market gains on 1256 positions held at year-end, similar to your situation. Nothing is entered in Part III of Form 6781.

nanoman
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