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Call us at 800.311.1145 to speak with one of our alternative investment specialists. We answer the phone in One Ring. Try It.Sign up to view performance on 100s of Managed Futures Programs, Trading Systems, and Managed Forex Programs. Sign up FREEWhat are Managed Futures? Is this the same as CTAs? How do I invest? Click here  to learn all of this and more on our extensive managed futures education pageHow to set watchlists? Build portfolios? Find correlations? and more. Click here to take a tour of our advanced toolsUse our most popular tool to create custom multi-program portfolios. Click here to get started today by signing up for FREE ACCESSClick below to learn how attain can assist your CTA in everything from back office creation and trade execution to finding a lawyer to create your D-DocNo upfront fees for managed futures funds is one of the unique benefits of a managed futures account at AttainOur alternative investment books list includes some of the most thought provoking and interesting books on alternative investmentsLearn how family offices outsource the managed futures research, due diligence, data collection, and ongoing monitoring of accounts to AttainWhat is a trading system? Who develops them, and how are they executed for client accounts? Our trading system education explains this and moreWe assist talented traders in getting their trading ideas into an automated trading system, do testing, marketing, and more

Managed Futures Make Tax Time a Little Easier

April 9, 2012

 

 

Oh, April. It’s a month of mixed emotions. While some would say that April showers bring May flowers, T.S. Eliot will tell you it “is the cruelest month”. Hal Borland professed that, “April is a promise May is bound to keep,” but Edna St. Vincent Millay considers it to be somewhat of a babbling idiot. Still, whether you’re a fan on April or not, if you pay taxes in the U.S., there is one day in April that will invariably make you cringe- April 15th, tax day.

While the average American detests this day, investors surveying their gains and losses often abhor the date even more as they compile statements to find their cost basis and take a look at the taxes they owe. However, the pain endured in the payment of taxes can differ greatly, depending on the kinds of investments you hold. Turns out, if you’ve invested in managed futures, you may be letting out a sigh of relief… unlike your stock investing counterparts.

Tax Advantages of Futures
 
Confused? Sit tight. We’re about to explain all of this.

What is different with futures tax accounting versus stocks?

Unlike stocks, futures based investments are based on their value at the end of the year, so any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. In addition, futures based investments do not require the accounting of individual trades. This is a godsend for any of you who have spent hours searching through old brokerage statements from 4 years prior trying to find the cost basis for a certain stock.

Taxes on the security side are trade-by-trade based, and depend when you got into a certain investment and when you got out. Conversely, taxes on your futures based investments are only concerned with the gross profit or loss achieved using commodity futures contracts for the year. This is good news for investors who could be with an active CTA program or trading system which trades several hundred or thousands of times in a year.

While both stocks (securities) and futures are eventually recorded as investment income or losses, there are big differences between the two for the purposes of your tax return. These differences are often overlooked by the average investor, but can add up to real tax savings. Let us first look at the securities side of things, which includes stocks, mutual funds, and ETFs (such as the SPDRs and QQQs).

Gains on securities such as stocks are taxed at either the short term capital gains rate of up to 35% or the long term capital gains rate of 15%. To receive the long term capital gains treatment, the securities investment must be held for longer than one year. One important thing to remember is that you are not taxed on the gain from a security until you sell that security. Thus if you bought GE 10 years ago and have held it ever since, you haven't paid any taxes on the gains of that investment, and won't until you sell (GE is actually down over 40% since 2000). Conversely, if you are an active trader and bought and sold the QQQs a few times in 2010, you are responsible for taxes equaling 35% of the gains.

The taxation of commodities investments, i.e. trading futures, is much different than that of securities. The main difference here is that futures gains or losses are taxed as of the end of the year, whether you actually got out of the investment or not in that year.  Any gains are treated as 60% long term capital gains (at up to a 15% maximum rate) and 40% short term capital gains (at up to a 35% maximum rate), regardless of the holding period. For example, an investor who holds a futures position for just a few minutes or hours can book 60% of the profits on that trade as long term gains - even though the trade was hardly long term. What a deal!

The enormity of this benefit for active traders should not be overlooked. Consider an investor weighing the differences between trading the QQQs and the e-mini Nasdaq futures. Equal profits in each instrument would be anything but equal after taxes, with the maximum combined rate for the e-mini NQs just 23% (calculation = 60% * 15% + 40% * 35%), versus a maximum rate of 35% for the QQQs. That's a savings of 12% by using e-mini futures over the exchange traded funds. It's no wonder e-mini volume has steadily grown year over year since being launched. For active traders, e-minis are simply the more cost effective choice.

The Back Story

But how did futures get such preferential treatment? It all started in the 1980s as the government tried to get a handle on the widespread use of "tax straddles" by professional commodities traders. Before the 1986 tax reform, commodities were taxed in much the same manner as securities, with insanely high short term capital gains taxes (of over 50%).

To help offset the often gaudy gains they were making, professional traders would put on “fake” trades towards the end of the year via a “Chicago spread” or “New York straddle” (which were essentially the same thing with only a geographic preference in terminology). In a spread trade, one side of the trade can be losing substantially while the other winning substantially, resulting in a net effect of zero. But these traders would game the tax system by offsetting the losing leg of the spread on the last day of the year, thereby realizing a large loss to offset against any gains for the year. They would then offset the winning portion on the first day of the new year, resulting in a net effect of zero, but booking a large loss in the previous year.

The government's answer to the "tax spread" was the introduction of Section 1256 contracts, which was a label for futures and commodities investments. Under the new rules, section 1256 contracts were to be marked to market as of the last day of the year, and thereby considered sold (or bought) with the end of year prices for tax purposes. The age of the tax spread was dead, as now both profits AND losses were reported in the current year.

For honest commodities investors who may have had no intention of selling their positions at year end, having to mark their positions to market put them out a great deal; and the government compromised by allowing 60% of the marked to market profits to be deemed as long term gains. This preferential treatment has endured ever since, even after Congress tried to reduce it in the 2003 tax reform act.

To achieve similar restrictions against selling losers and keeping winners at the end of the year, securities laws have the Wash Sale rule, which disallows losses if the losing position is reentered within 30 days. Section 1256 contracts are exempt from the wash sale rule, giving commodities another benefit over securities. It should be noted that investors can achieve active trader status and become exempt from the wash sale rule on the securities side.

Even Losers Win?

If you’re looking at losses from the previous year on your managed futures investments, this may bring you a small amount of comfort. You see, futures based investments do not have the same tax treatment most people are used to with their traditional investments in stocks and bonds. One of the benefits of this difference in tax treatment is the ability to bring losses three years back.

What does that mean, exactly? Well, assume that you made the following amounts in an actively traded managed futures investment: $10,000 in 2007, $15,000 in 2008, and $25,000 in 2009 when volatility was rocking. Assuming you are at the highest tax bracket (35%), you would have paid the government approximately $11,500 in taxes across those three years at the blended 23% capital gains tax rate for futures.

Now, assume the lower volatility in 2010 wound up dragging down your managed futures investments and left you with losses of $20,000. Futures contracts special tax treatment essentially allow you to take that -$20,000 loss back into 2008 and 2007 to offset part of those gains. After offsetting the $10K in 2007 and $10K of the 2008 gains, you would have been left with just $30K in gains over the three years versus $50K, and your tax due across all three years would switch to just $6,900 – a refund of about $4,600 (or about 40% of the taxes paid). This simplistic example is to illustrate the concept of bringing back losses – the actual amount able to be brought back would vary based on several other factors.

Before you get too excited, realize that there are a few exceptions to this. For one, this is only available to individuals- not corporations, partnerships, or trusts. As such, and really, as always, it is best to consult your tax accountant for more information.  But you can see this is quite a bit better than the puny $3,000 a year loss carry forward available in stock trading. (Again - those with active trader status can treat losses as ordinary gains/losses).

Finally, for those investors utilizing a trading system and/or professional Commodity Trading Advisor (CTA) there is yet another benefit. As with securities, investors may be able to claim a deduction for the system fees, CTA management fees, and CTA incentive fees paid throughout the year. This number is not included in the Section 1256 gains/losses calculations, so that number is actually higher than what you made on the investment net of all fees. Still, investors may be able to treat these fees as a deductible investment expense.

In conclusion, there is a lot to like about an investment in managed futures or a trading system from a tax perspective, especially when comparing it to an investment in actively traded stocks. 

Filling out your tax forms:

Futures gains and losses should be reported on Form 6781 (http://www.irs.gov/pub/irs-pdf/f6781.pdf) for US citizens, which comes over onto Schedule D of Form 1040 on lines 4 and 11. Schedule D: http://www.irs.gov/pub/irs-pdf/f1040sd.pdf

*Some of the information in this article was verified with Attain Portfolio Advisor's accountant John Lane, CPA and on the very comprehensive website: www.GreenTraderTax.com; a professional tax service; as well as an article by Robert A. Green, CPA, in the August 2003 issue of Active Trader magazine. 

 

 

 

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: The Bull Wobbles Again

Though the Good Friday holiday made for a shortened week, there was no lack of activity in the futures markets. In indices, the Dow fell -1.25%, the S&P 500 fell -0.93%, the Nasdaq rose 0.11%, the S&P Mid-Cap 400 E-mini lost -1.26%, and the Russell 2000 E-mini lost -1.76%. In bonds, US 10-year notes were up 1.21%, and US 30-year bonds rose 1.81%. In currencies, the US Dollar rose 1.20%, the Japanese Yen gained 1.61%, the British Pound was down -0.88%, the Euro fell -1.96%, and the Swiss Franc lost -1.70%.

In metals, Gold lost -2.50%, Silver was down -2.32%, Copper lost -0.77%, Platinum was down -2.22%, and Palladium was down -1.42%. In energies, Crude rose 0.28%, Heating Oil fell -0.03%, RBOB Gasoline was up 0.98%, and Natural Gas remained at or near all-time lows, finishing the week down -1.74%.

In grains, Corn was up 2.21%, Wheat fell -3.37%, and Soy rose 2.21%, touching a 7-month high. In meats, Live Cattle was down -0.41% after setting a new 8-month low, and Live Hogs were up 3.51%. In Softs, Cocoa fell -5.00%, Orange Juice lost -3.53%, Cotton lost -5.33%, Coffee was up 0.30%, and Sugar fell -0.53%.

Trading Systems

In day trading systems PSI! TF gained $380.70. On the swing trading side, Jaws US 60 lost -$841.25, MoneyBeans S lost -$505, MoneyMaker ES was up $202.50, and Strategic ES gained $257.50.

CTAs

It was yet another good week for agriculture programs, which sported the highest category average among the programs we track. Short term, option, and trendfollowing strategies all had a program or two that did well, including some of the week’s best performers, but the categories were mixed overall. Check out the full heat map below.

 

Program

%**

Max DD*

Strategy Type

Quantum Leap Capital (QEP Only)

3.82%

-24.44%

Short Term

HB Capital

3.22%

-13.79%

Option

Crescent Bay BVP

2.30%

-32.69%

Option

Clarke Capital Management, Inc. Global Basic

1.55%

-46.49%

Trendfollowing

Tanyard Creek Capital (QEP Only)

1.19%

-14.17%

Agriculture

Global Ag (QEP Only)

1.16%

-17.57%

Agriculture

Futures Truth SAM 101

0.74%

-12.62%

Multi-Strategy

NDX Shadrach

0.74%

-19.38%

Agriculture

P/E Investments FX Strategy - Standard

0.67%

-15.01%

Currency

NDX Abedengo

0.55%

-10.28%

Agriculture

2100 Xenon Fixed Income Program:

0.46%

-7.46%

Fixed Income

GT Capital

0.46%

-11.79%

Discretionary

James River Capital Corp. - Navigator

0.44%

-18.60%

Trendfollowing

Auctos Capital Management

0.42%

-12.25%

Multi-Strategy

2100 Xenon Managed Futures (2x) Program:

0.42%

-18.40%

Multi-Strategy

Hoffman Asset Management, INC. Managed Account

0.41%

-19.38%

Trendfollowing

Bluenose Capital Management LLC - BNC BI

0.14%

-5.77%

Option

Integrated Managed Futures Corp. IMFC Global Concentrated

0.14%

-10.31%

Multi-Strategy

Covenant Capital Management Aggressive

0.07%

-20.41%

Trendfollowing

Rosetta (QEP Only)

-0.01%

-39.67%

Agriculture

Bluenose Capital Management LLC - BNC EI

-0.10%

-9.98%

Option

Mesirow Absolute Return

-0.12%

-1.56%

Discretionary

Cervino Diversified Options

-0.17%

-8.34%

Option

Paskewitz

-0.17%

-18.21%

Stock Index

Clarke Capital Management, Inc. Global Magnum

-0.17%

-41.50%

Trendfollowing

AFB LLC FortyEighter Gold Options

-0.17%

-44.10%

Gold

Reynoso Capital Management - Small Accounts

-0.17%

-16.05%

Option

Futures Truth MS4 (QEP Only)

-0.19%

-9.18%

Multi-Strategy

Cervino Diversified 2x

-0.24%

-17.32%

Option

Emil Van Essen, LLC Combined (Low Min)

-0.29%

-36.21%

Spread Trading

FCI CPP

-0.35%

-18.73%

Option

Emil Van Essen, LLC Commodity Only (Low Min)

-0.37%

-36.21%

Spread Trading

Clarke Capital Management, Inc. Worldwide

-0.37%

-30.83%

Trendfollowing

Dominion Capital Management (QEP Only)

-0.46%

-15.22%

Short Term

Bel Air Capital Asset Management

-0.50%

-24.05%

Multi-Strategy

FCI OSS

-0.89%

-52.73%

Option

White River Group Diversified Option Writing

-1.00%

-15.08%

Option

Cervino Gold

-1.51%

-6.69%

Gold

Attain Portfolio Advisors - Strategic Diversification Program

-1.72%

-24.39%

Multi-Strategy

Bouchard Capital, LLC Short Term Multi Commodity

-5.97%

-13.79%

Short Term

 

 

*Max DD= A drawdown is the “pain” experienced by an investor in a specific investment. As an example, an investor starting out with a $100,000 account who sees it fall down to $80,000 before it runs back up to $110,000 saw a $20,000 loss ($100K – $80K), which would equal a -20% ($20K/$100K) drawdown. The so called Maximum Drawdown (Max DD) is the worst such peak to valley down period for an investment.

**Disclaimer: Past performance is not necessarily indicative of future results.  These performance numbers are calculated using the liquidating value of a single client at Attain trading the listed program, and are believed to be representative of all similar clients invested in the program.  A 20% incentive fee and 2% annual management fee are deducted from all profitable months, regardless of whether the program is at a new equity high.  These numbers may vary from the actual performance numbers presented by the CTA upon completing their accounting for the month gone by, and should not be considered apart from the performance numbers listed in the disclosure document for the program listed.

 

 

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.