My brother opened an account at forex.com for me and traded several currency pairs (USD/JPY, GBP/USD, EUR/JPY, etc.), how can I find out where these gains/losses should be reported on 1040? Are they by default traded as IRC 1256 or IRC 988? I know that if you have gains, you are better off with IRC 1256 due to the 60/40 treatment, and if you have losses, you are better off with IRC 988. If I didn't make any election before I traded, which of these is the default way to report my gains/losses? How can I tell if I am dealing with spot forex or future forex? How can I tell if I am trading any foreign currency futures listed on foreign exchanges? Is it true that any open position I have at the end of the year should also be considered sold by "mark to market"? Any professional opinion would be greatly appreciated!

All good questions thanks.

We answer them on our Web site forex tax page here http://www.greencompany.com/Educatio...Currency.shtml.

We can't give you more specific answers on this board, as our attorneys have advised us to do one by one consultations for specific answers due to the nature of the vagueness in the tax law for forex. Other trader tax questions are not vague and we can give clear answers on the board.

So consider a professional consultation with us here http://www.greencompany.com/Traders/...nsulting.shtml

We also handle these issues for clients in tax preparation. http://www.greencompany.com/Traders/TraderTaxPrep.shtml.

Act on your own with our content or consider more help with our services. Good luck.

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ABC,
I do have same problem. I figured out that by default it is IRC 988 unless you opt out. Did you get any answers to your questions?
Thanks,
Madhuri

Yes, answers were posted above, thanks.

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If the the forex gains/losses were to be treated under Section 1256, would the open positions at the end of the calendar year be marked to market or do they remain unrealized until they are sold? Thank you for your help.

One other question...are there any specific requirments in opting out of Section 988? Is there a specific form that needs to be filed with the IRS? Thanks.

No, the election out of IRC 988 for IRC 1256 is an internal election in your own books and records. It's not an external election which you file with the IRS. Send yourself an email when you start forex trading and state you are electing out of IRC 988 for IRC 1256 on a global "good to cancel" basis. There is no specific tax form or specific statement to use.

Learn more on our forex tax page.

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I have a modest $4000 spot profit in 2006 .....

1.On the 1256 form 6781 I cant work out where to enter my spot trade profit..

Is it just in part 1. as a summery total.

2. Do I need to enter my open positions in part III ( in the instructions it says enter MTM profits then the last comment is : Do not complete Part III if you do not have a recognized loss on any position.

3. I have no 1099 -B do I need to include any other details?

If my marginal tax rate is below the average 35% do I just pay my highest income rate on the portion taxe at short term rate?


Wow the trading is hard but the tax is even worse...help...

If you elected out of IRC 988 (for major currencies), report your forex gain like a futures gain on Part I of Form 6781. Summary number just like reporting a futures gain.

You benefit from the 60/40 tax rate split (long term versus short term capital gains tax rates) at all tax brackets.

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I trade major pairs: EUROUSD, GBPUSD, AUDUSD, USDJPY

but also cross pairs: EUROJPY, GBPJPY, AUDJPY

These cross pairs are really combination of primary pair and dollar yen:

EUROJPY = EUROUSD * USDJPY
GBPJPY = GBPUSD * USDJPY
AUDJPY = AUDUSD * USDJPY

Since these cross rates are manufactured from dollar based pairs, can it be argued that can be opted out of 988? You can go to future market and trade this combination to get the cross pairs.

Is it stretching things?

BY THE WAY, ONE CME future trading, they have created ability to trade cross pairs above:

http://www.cme.com/trading/prd/fx/crossrates.html

So I guess we can justify ALL primary and CROSS RATES listed are 60/40? That would be a great argument... I think we're covered.

Hi,

I've got a question but I'm not sure if this is where to ask it. People often form corporations for small businesses to help lessen their taxes and such. Can a person set themselves and their trading activities up as a corporation to do the same as small businesses?

-Justin

C-Corps are not good entities for trading businesses.

Gains are subject to double taxation. The only way to avoid double taxation is to pay compensation to the owner, which causes payroll/SE tax; otherwise not due on trading gains.

Losses are trapped on the entity-level, whereas with a pass-through entity like an S-Corp, the losses pass to the individual owner for immediate tax relief.

There is no 60/40 tax rates.

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