In other words, to the extent you have capital losses, there’s no need to hang onto winner shares for at least a year and a day in order to pay a lower tax rate.
Unfortunately when you sell ETFs for short-term gains, you must pay your regular federal tax rate, which can be as high as 39.6% (or 43.4% if the 3.8% net investment income tax applies).
Under a special unfavorable rule, even long-term gains from precious metal ETFs can be taxed at up to 28% (plus another 3.8% if the net investment income tax applies), because the gains are considered collectibles gains.
Thankfully, there is a way to play the market in a short-term fashion while paying a lower tax rate on your gains: consider trading in broad-based stock index options.
Favorable tax rates on short-term gains from broad-based index options Our beloved Internal Revenue Code treats broad-based stock index options, which look and feel a lot like options to buy and sell comparable ETFs, as Section 1256 contracts.
The tax-saving result is that short-term profits from trading in broad-based stock index options are taxed at a maximum effective federal rate of only 27.84% [(60% × 20%) + (40% × 39.6%) = 27.84%], or 31.64% if the 3.8% net investment income tax applies.
If you’re in the top 39.6% bracket, that’s a 29.7% reduction in your tax bill (ignoring the possible impact of the net investment income tax).
The effective rate on short-term gains from trading in broad-based stock index options is only 19% [(60% × 15%) + (40% × 25%) = 19%].
Favorable treatment for losses too If you suffer a net loss from trading in Section 1256 contracts, including losses from broad-based stock index options, you can choose to carry back the net loss for three years to offset net gains from Section 1256 contracts recognized in those earlier years, including gains from broad-based stock index options.
Finding broad-based stock index options A fair number of options meet the tax-law definition of broad-based stock index options, which means they qualify for the favorable 60/40 tax treatment.