"By default, forex spot and forward contracts have Section 988 ordinary gain or loss treatment. Traders holding these forex contracts as capital assets may file an internal contemporaneous “capital gains election” pursuant to IRC § 988(a)(1)(B) to opt out of section 988 and into capital gains and loss treatment. Forex is traded in two ways: as currency futures on regulated commodities exchanges, which fall under the tax rules of IRC Section 1256 contracts, or as cash forex on the unregulated interbank market, which fall under the special rules of IRC Section 988. Many forex traders are active in both markets. Forex trade profits can be reported under two sections of the IRS code, Section 1256 or Section 988. Under Section 1256, profits from foreign currency trading are split between short-term and long-term capital gains. Profits categorized under Section 988 are regarded as interest revenue and taxed as ordinary income. Oct 31, 2019 · FOREX contracts and reporting requirements are governed by rules established in IRC Section 1256 and Section 988. Section 1256 generally applies to foreign currency futures traded on U.S. exchanges, while other forex contracts fall by default under Section 988 – unless you opt out. More on that in a bit.
Aug 16, 2012 · In this case, the client prefers Section 988 ordinary loss treatment, rather than Section 1256 capital loss treatment subject to the $3,000 loss limitation against ordinary income.
This started the conflict between IRC 988 and 1256. IRC 988 already included "foreign currency transactions" and "forward contracts" in the interbank market, which Congress said it now intended to be included in IRC 1256. Congress was clear about including "forward contracts" in forex in IRC 1256, but they did not mention spot forex… There are essentially two sections defined by the IRS that apply to forex traders - section 988 and section 1256. Section 1256 is the standard 60/40 capital gains tax treatment. This is the most common way … Sec. 1256 also contains a special income characterization rule, which generally does not apply to foreign currency contracts. In general, gain or loss from foreign currency contracts is ordinary under Sec. 988, … For purposes of the preceding sentence, the determination of whether any transaction is a section 988 transaction shall be determined without regard to whether such transaction would otherwise be … Forex trade profits can be reported under two sections of the IRS code, Section 1256 or Section 988. Under Section 1256, profits from foreign currency trading are split between short-term and long-term capital gains. Profits categorized under Section 988 … "By default, forex spot and forward contracts have Section 988 ordinary gain or loss treatment. Traders holding these forex contracts as capital assets may file an internal contemporaneous “capital gains election” pursuant to IRC § 988(a)(1)(B) to opt out of section 988 …
You can elect to have FOREX income taxed under Internal Revenue Code Section 988 or Section 1256. You must make your choice as of January 1 for the coming year or FOREX earnings automatically fall under S.988. The S.988 rules define all gains or losses from currency trading as ordinary income or losses.
Aug 29, 2017 Then I see IRC 1256(b)(1) covers "any foreign currency contract", as if to include spot transactions. It seems the logic is, by "opting out" of 988, you negate the 988 treatment and are then free to treat the spot transaction under 1256, as spot is still a "foreign currency … Dec 07, 2008 Feb 22, 2007 What Is the Purpose of Section 1256 Contracts? Section 1256 contracts prevent tax-motivated straddles that: Defer income; Convert short-term capital gains into long-term capital gains; To do so, Section 1256 requires that these contracts be reported using mark-to-market rules. You might hold Section 1256 … The IRS allows you the option of treating your currency-trading gains under either 1256 or 988 rules, whether you deal in options, futures, or the spot market. You must make this election before the …
Section 988 of the Internal Revenue Code Treatment of Certain Foreign Currency a taxpayer can make an election to treat a foreign currency gain or loss as a
As a forex trader, you have a choice of two very different tax treatments: Section 988 or Section 1256. Jul 27, 2017 Jul 27, 2017 Mar 13, 2011 Jul 01, 2020
Aug 16, 2012 · In this case, the client prefers Section 988 ordinary loss treatment, rather than Section 1256 capital loss treatment subject to the $3,000 loss limitation against ordinary income.
Section 988.--Treatment of Certain Foreign Currency Transactions 26 CFR 1.988-1: Certain definitions and special rules. (Also § 1.988-2.) Rev. Rul. 2008-1 ISSUE What is the characterization for U.S. federal tax purposes of an instrument (described further below) that is issued and redeemed for U.S. dollars, but that Except as provided in regulations, a taxpayer may elect to treat any foreign currency gain or loss attributable to a forward contract, a futures contract, or option described in subsection (c)(1)(B)(iii) which is a capital asset in the hands of the taxpayer and which is not a part of a straddle (within the meaning of section 1092(c), without regard to paragraph (4) thereof) as capital gain or > currency traders must "elect out" of IRC section 988 (the ordinary gain or loss rules for special currency transactions) if they want the tax-beneficial 60/40 capital gains rate treatment of IRC section 1256. Subsec. (b). Pub. L. 98-369, 102(a)(2), in par. (1), substituted “any regulated futures contract" for “with respect to which the amount required to be deposited and the amount which may be withdrawn depends on the system of marking to market; and”, in par. (2), substituted “any foreign currency contract," for “which is traded on or subject to the rules of a domestic board of trade The IRS allows you the option of treating your currency-trading gains under either 1256 or 988 rules, whether you deal in options, futures, or the spot market. You must make this election before the trading year begins on January 1. currency contracts. See section 988 and Regulations sections 1.988-1(a)(7) and 1.988-3. If an election is made under section 988(a)(1)(B) or 988(c)(1)(D), attach to your return a list of the contracts covered by the election(s). On the attachment, show the net gain or loss reported from those contracts and identify where the gain or loss is Forex Tax Treatment Get the best of both worlds with forex taxes: Ordinary losses in Section 988 or elect capital gains for a chance to use lower 60/40 rates in Section 1256(g) “Forex” refers to the foreign exchange market where participants trade currencies, including spot, forwards or over-the-counter option contracts.