Forex

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 transactions start off receiving ordinary gain or loss treatment, as dictated by Section 988 (foreign currency transactions). The good news is Section 988 ordinary losses offset ordinary income in full and are not subject to the $3,000 capital loss limitation — that’s a welcome relief for many new forex traders who have initial losses and offset the losses against wage and other income.

Section 988 allows investors and business traders — but not manufacturers — to internally file a contemporaneous “capital gains election” to opt-out of Section 988 into capital gain or loss treatment. This is a way to generate capital gains to use up capital loss carryovers, which otherwise may go wasted for years.

The capital gains election on forex forwards allows the trader to use Section 1256(g) treatment with lower 60/40 capital gains rates on major currencies if he doesn’t take or make delivery of the underlying currency. “Major currencies” means currencies for which currency RFCs trade on U.S. futures exchanges.

We make a case to treat spot forex like forwards for purposes of using Section 1256(g)…

Excerpt from Green’s 2019 Trader Tax Guide. There is significant content on forex tax and accounting in the guide. 

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