Taxation of Income & Loss from Trading of Futures & Options (2024)

FAQs

Is loss on futures and options taxable? ›

Loss on F&O transactions is not taxable. However, as is the case with any other business loss, mentioning it in your return allows you to claim some expenses. These expenses are those that you incur while undertaking F&O trade.

I also trade in Future & Options (F&O). I understand that the gains from investment get taxed at a flat rate of 10% beyond the initial one lakh.

Trading futures comes with unique tax advantages over trading equities and ETFs. Under Section 1256 of the U.S. Internal Revenue Code, when trading markets such as futures, capital gains and losses are calculated at 60% long-term and 40% short-term.

Taxability of Futures and Options (F&O Trading)

The profit or loss from Futures and Options trading must be considered "non-speculative" business income under the Income Tax Act of 1961. Traders are required to disclose both profits and losses on their income tax returns (ITR).

You can deduct stock losses from other reported taxable income up to the maximum amount allowed by the IRS—$3,000 a year—if you have no capital gains to offset your capital losses or if the total net figure between your short- and long-term capital gains and losses is a negative number, representing an overall capital ...

Futures, forex, and options

Have you traded futures, foreign exchange, index options, or any products that are marked-to-market? If so, you'll need to file Form 6781, Gains and Losses Form Section 1256 Contracts and Straddles.

The appropriate ITR form for filing F&O income depends on whether it is treated as business income or capital gains: Business Income: F&O traders treating their income as business income need to file ITR-3, which is applicable for individuals and HUFs having income from profits and gains of business or profession.

One approach to trading and potentially avoiding significant tax bills is to go for long-term investments, which are taxed at a lower rate than short-term security trading. In general, if a position is held for more than 365 days, it is considered a long-term investment.

The IRS applies what is known as the 60/40 rule to all non-equity options, meaning that all gains and losses are treated as: Long-Term: 60% of the trade is taxed as a long-term capital gain or loss. Short-Term: 40% of the trade is taxed as a short-term capital gain or loss.

When you trade futures, you pay taxes on your capital gains– just like you would when you trade equities. But unlike equities, which are taxed based on how long you hold them, regulated futures trading profits are taxed using a 60/40 rule. 60% of gains are taxed as long-term gains and 40% are taxed as short-term gains.

How do you calculate profit loss on futures trades? ›

Calculating profit and loss on a trade is done by multiplying the dollar value of a one-tick move by the number of ticks the futures contract has moved since you purchased the contract.

If you are trading in Futures and Options, you should get your accounts audited if your turnover is more than ₹10 crore. You can also apply a presumptive taxation scheme if your turnover does not exceed ₹2 crore and declare that your taxable income is at 6% of the total Futures and Options turnover.

For Futures & Options, turnover is calculated as the absolute sum of all profit and loss from the transactions. You don't consider the total value of the contracts traded, but only the net results of your trading activities.

Capital Gains Advantages. While short-term capital gains from stocks or ETFs are taxed at your ordinary income tax rate, futures are taxed using the 60/40 rule: 60% are taxed at the long-term capital gains tax rate of 15%, while only 40% of your short-term capital gains are taxed at your ordinary income tax rate.

Do You Pay Taxes on Options? If you sell an option and make a profit, you create a taxable event. The IRS requires you to report it and pay taxes if necessary. You're also required to report any losses from options trading.

Deduction for taxes:

One major advantage of displaying the loss is that you can deduct it from any other revenue you generate. A loss on a F&O trade can be deducted from any income except your wage. This can include earnings from a home, a business or profession, or any other source. It lowers your total tax liability.

No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

Reporting F&O trades accurately in the income tax return is essential to ensure compliance with tax laws:Business Income: If treated as business income, F&O gains and losses should be reported under the head "Profits and Gains of Business or Profession" in the ITR form.