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In U.S., capital gains are treated as income and get taxed. For securities, long

ID: 2717329 • Letter: I

Question

In U.S., capital gains are treated as income and get taxed. For securities, long-term gains have higher tax rate than short-term gains. When one invests in futures market, the gains/losses are realized every day, which is called daily settlement. Then are the gains treated as short-term gains for taxation? If futures gains are treated differently, how does the tax rule affect the behavior of speculators? In U.S., capital gains are treated as income and get taxed. For securities, long-term gains have higher tax rate than short-term gains. When one invests in futures market, the gains/losses are realized every day, which is called daily settlement. Then are the gains treated as short-term gains for taxation? If futures gains are treated differently, how does the tax rule affect the behavior of speculators? In U.S., capital gains are treated as income and get taxed. For securities, long-term gains have higher tax rate than short-term gains. When one invests in futures market, the gains/losses are realized every day, which is called daily settlement. Then are the gains treated as short-term gains for taxation? If futures gains are treated differently, how does the tax rule affect the behavior of speculators?

Explanation / Answer

In future's market, short term capital gain tax is higher than long term gain tax. People therefore are likely to hold for future for few more days to benefit from lower capital gain tax. Futures are traded in 60/40. This means 60% of gain is taxed at long termgain trading of 15% and 40% of gain is taxed at short term gain tax of 35%. Since stock is taxed at constant rate of 35%, futures give option to the investor of availing lower tax benefit in 60/40 rule.

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