Forex & Taxes

If you are trading in the forex cash market, you can choose to be taxed under the same tax rules as regular commodities (Internal Revenue Code (IRC) Section 1256 contracts) or you can choose to be taxed under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies to cash forex unless you elect to opt out.

Under section 1256 forex traders have a large advantage over stock traders. By reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles), forex traders can split their capital gains on Schedule D using a 60/40 split. This means that 60% of the capital gains are taxed at the lower, long-term capital gains rate and the remaining 40% at the ordinary or short-term capital gains rate, which depends on the tax bracket you come under.

You don't have to file anything with the IRS to opt out of Section 988 and take advantage of section 1256, but you do have to keep good records in your own books about the fact that you are opting out of Section 988 before you even start a trade.

This information is strictly for educational purposes only and is not tax or investment advice of any kind. Make sure you consult a tax professional about your forex taxes.