IRS Treats Open Gold Futures Contract as Sold, Affecting Tax and Social Security

A retiree in his early seventies bought a one-ounce gold futures contract to hedge against dollar uncertainty, but he never sold it. Instead, the IRS treated the open position as though it were sold for fair market value on December 31, the last business day of the tax year.

The Section 1256 rule applies to regulated futures contracts, marking them to market at year-end and recognizing the difference between the contract's tax basis and its fair market value. This recognized amount is taken into account when the contract is eventually disposed of, preventing the same gain from being taxed twice.

Under the 60/40 rule, 60% of the gain is treated as long-term capital gain and 40% as short-term capital gain, regardless of how long the contract was held. This unusual treatment can affect Social Security benefits, which do not count capital gains under the retirement earnings test.

However, a year-end futures gain can push more of the retiree's Social Security benefit into taxable territory, increasing their Medicare premiums in two years' time. The income-related monthly adjustment amount (IRMAA) is based on modified adjusted gross income from two years earlier, with higher premiums applying at $109,000 for individuals and $218,000 for married couples filing jointly.