Big loss year on futures — Section 1256 carryback questions

Had a brutal year trading ES and NQ futures. Down about $180K for 2024. I know these are Section 1256 contracts which get special tax treatment.

Can I carry these losses back to previous tax years and get refunds? I made decent money in 2022 and 2023 and paid a lot in taxes. Really need that cash back right now.

Bad news: Section 1256 losses can't be carried back anymore. That provision was eliminated.

The CARES Act (2020) temporarily allowed 5-year carrybacks for net operating losses (NOLs), but that was only for losses from 2018, 2019, and 2020. It expired.

For your 2024 losses, you can carry them forward indefinitely to offset future Section 1256 gains, but there's no carryback option.

Damn. So I'm just sitting on a $180K loss that I can only use if I make money trading in the future? What if I never make it back?

The carryforward is unlimited though. I had a $200K loss in 2020 from options on futures. Took me until 2024 to fully use it up but I didn't pay taxes on any gains during that time.

Also make sure you understand the 60/40 rule for 1256 contracts - 60% is taxed as long-term capital gains (20% max rate) and 40% as short-term (ordinary income rates). That applies to both gains AND losses.

Correct on the 60/40 treatment. For OP's $180K loss:

• $108K (60%) is long-term capital loss
• $72K (40%) is short-term capital loss

One important limitation: you can only deduct $3,000 of net capital losses per year against ordinary income. The rest carries forward.

So if you have NO other capital gains in 2024, you can only deduct $3K from your 2024 income. The remaining $177K carries forward to future years to offset future capital gains (or $3K/year against ordinary income if you have no gains).

Wait so at $3K/year it would take me 60 years to use up the loss if I never trade again? That's insane.

I do have a W-2 job that pays about $150K. Can I use more of the trading loss against that income?

No, that's the $3K annual limit for capital losses against ordinary income (like W-2 wages). It's a harsh rule but it's in the tax code (IRC Section 1211).

Your only options to use the losses faster:

• Generate future capital gains from trading or investments that the losses can offset
• If you qualify for trader tax status (TTS), you MIGHT be able to make a Section 475 mark-to-market election for future years, which converts capital losses to ordinary losses. But you can't make that election retroactively for 2024.

The 475 election is what saved me. I had a similar situation in 2019 - huge loss. Made the election for 2020 and converted to mark-to-market accounting.

Under MTM, all your gains and losses are ordinary income/loss, not capital. So no $3K limit. If you lose $180K, you can deduct the full amount against your other income.

BUT the election has to be made by the tax filing deadline of the PRIOR year (with extension). So for 2026, you'd need to file the election by Oct 15, 2025.

Important caveat on the Section 475 election: it's irrevocable without IRS consent. Once you elect it, you're locked in. And it eliminates the beneficial 60/40 treatment.

For someone with $180K in losses, MTM might make sense going forward. But understand the tradeoffs:

• Benefit: All losses are ordinary (fully deductible against W-2 income, no $3K limit)
• Downside: All gains are also ordinary income (taxed at ordinary rates up to 37%, not the favorable 60% long-term rate)
• Requirement: You must qualify as a "trader in securities" - substantial, continuous trading activity. IRS looks at frequency, holding periods, intent to profit from short-term market swings.

I was trading pretty actively in 2024 - probably 300+ round trips on ES/NQ. Mostly day trading and swing trading, rarely held overnight. That probably qualifies me for TTS right?

If I make the 475 election for 2026, can I still use my 2024 losses to offset 2026 gains?

300+ trades is strong evidence for TTS, especially if you were trading almost daily and holding for short periods. You'd want to document:

• Trading was substantial and regular (4+ hours/day, 4+ days/week)
• Trades were frequent (you're well above the typical threshold)
• Holding periods were short (day trading and swing trading support this)
• You were seeking profit from short-term price movements, not long-term appreciation

On the loss carryforward: here's the tricky part. Your 2024 losses are Section 1256 capital losses. When you elect 475(f) MTM, it only applies going forward. Your existing capital loss carryforwards remain as capital losses - they don't convert to ordinary losses.

So you'd have $177K of capital loss carryforward that can offset future capital gains, but if all your 2026+ trading is MTM ordinary income, you won't have capital gains to offset. You'd still be stuck with the $3K/year limitation.

That's the paradox of the 475 election with existing loss carryforwards. Your options:

• Don't elect 475: Keep trading under 1256 treatment. Use your loss carryforward to offset future 1256 gains. But if you have another big loss year, you're back to the $3K limit problem.
• Elect 475: Future losses are fully deductible, but your existing $177K carryforward is stranded as capital losses unless you generate capital gains from other sources (stocks, real estate, crypto, etc.)

Some traders in your situation do both - elect 475 for futures, but also invest in stocks/ETFs on the side to generate capital gains that can absorb the old capital loss carryforwards. But that requires having capital to deploy and taking on market risk.

Honestly, given your situation, I'd recommend consulting with a CPA who specializes in trader taxes before making any elections. The wrong choice could cost you tens of thousands.

This is way more complicated than I thought. Going to talk to a trader tax CPA. Thanks everyone for the detailed explanations - at least I know what questions to ask now.

Main takeaway: can't carry back, stuck with the losses going forward, and need to think carefully about the 475 election.