The Three-Year Carryback Nobody Uses

Here is the provision that makes § 1256 genuinely unique, and that most taxpayers with § 1256 losses never claim. An ordinary capital loss goes forward, indefinitely, at $3,000 a year against ordinary income. A net § 1256 contracts loss can go backwards.

Under IRC §1212(c), “Capital loss carrybacks and carryovers” a non-corporate taxpayer may elect to carry a net § 1256 loss back to each of the three preceding taxable years, applied against § 1256 gains in those years, oldest year first. The carried-back amount keeps its 60/40 character under § 1212(c)(1)(B). Two limits: it cannot exceed the net § 1256 contract gain in the carryback year, and it cannot create or increase a net operating loss there. Estates and trusts are excluded.

If you had § 1256 gains in any of the last three years and a § 1256 loss this year, make the election — it converts a loss you would have carried forward for a decade into a refund check. You make it by checking box D on Form 6781, “Gains and Losses From Section 1256 Contracts and Straddles” and filing an amended return for the carryback years. No equity trader has anything comparable.