I will give you a quick summary of taxes on commodity trading and then I will walk you through an example of how to calculate them for your tax return.
Taxes on Commodity TradingYou should receive a 1099-B Form from your broker before January 31. This form will state your profits and losses from the previous year’s commodity trading. Subtract the losses from the profits and that will give your capital gains. There are favorable tax rates for commodities as they are taxed at 60% long-term capital gains and 40% short-term capital gains. Long-term gains are capped at 15% and short-term gains are taxed at your ordinary tax rate, which depends on your adjusted income. You do not have to worry about accounting for and listing each individual trade on your tax returns. You just need to know your net profit or loss.
Typical Example for Filing Taxes on Commodities TradingLet’s presume you traded futures all year and you estimate you made a $5,000 profit for the year. To make certain, you wait to receive your 1099-B Form from your broker. This is probably titled - 1099-B Proceeds from Broker and Barter Exchange Transactions. It will list your profits and losses for the year.
Next you will need to use an IRS Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles. Commodities and futures are considered 1256 Contracts for IRS purposes. On line 1 you will plug in your gains and losses from the 1099-B Form. Continue the form where you add the profits and losses to get a final number. For example this number may be a profit of $5,000. Commodities are marked to market at the end of the year. This means that even if you have open positions, they will be calculated as profits and losses as if they were closed positions.
Now, we have to calculate the capital gains. Commodities have a slightly more preferential tax treatment than stocks. With commodities, 60% of the gains are treated as long-term capital gains and 40% are treated as short-term capital gains. It does not matter the amount of time you held the contracts, this is how they are taxed. With stocks, anything held less than 12 months is considered short-term capital gains and you are taxed at whatever tax bracket you are in. Long-term capital gains are capped at 15%, which is much more favorable to those with higher incomes.
Follow lines 8 and 9 and calculate your capital gains. In this example, on line 8 you would multiply 5,000 x 40% = $2,000. On line 9, you would multiply $5,000 x 60% = $3,000. You then plug these numbers into your Schedule D Form – Capital Gains and Losses. After the Schedule D worksheet is completed you transfer the numbers to your 1040 Form and you are done!
There are some more in-depth issues that pertain filing taxes for commodity trading, but I will just give you a quick overview. The above information for taxes on commodities should cover most people who do not strictly trade for a living.
Trader Tax Status
There are some favorable issues for those who can claim trader tax status. To qualify for trader tax status, you must be a full time trader, not a part-time trader who doesn’t trade every day and has a full time job.
With a trader tax status, you can claim your losses and “business” expenses as ordinary losses and they can be deducted right from your income. Also, the losses are not subject to the maximum of $3,000 in capital losses. Another great advantage is that if you made a lot of money trading in the previous year and lost a lot in the following year, you can go back and amend the previous year by deducting those huge losses. This allows you to get a refund from the previous year where you had paid a lot of taxes.