Other Financial Products
Foreign futures, precious metals, volatility ETNs, Nadex binary options, swaps, and deposit losses.
Traders have a bevy of financial products to choose from these days.
Many foreign brokers promise Americans Section 1256 tax breaks on foreign futures. They mention Commodity Futures Trading Commission (CFTC) “no action letters” granting certain foreign futures exchanges approval for marketing to Americans. These brokers overlook the other requirement: an IRS revenue ruling allowing Section 1256 tax treatment to the foreign futures exchange. There are only a handful of foreign futures exchanges that currently have this IRS revenue ruling. Without Section 1256 treatment, report foreign futures like securities on Form 8949. Read Tax Treatment For Foreign Futures.
Physical precious metals are “collectibles” which are a special class of capital assets. If you hold collectibles over one year (long-term), sales are taxed at the “collectibles” tax rate — the taxpayer’s ordinary rate capped at 28%. If you hold collectibles one year or less, the short-term capital gains ordinary tax rate applies no different from the regular STCG tax rate. Report realized gains and losses in collectibles on Form 8949 and Schedule D along with other capital gains and losses, which means the capital loss limitation of $3,000 against ordinary income applies on individual tax returns. Read Tax Treatment For Precious Metals.
Volatility Products & Exchange Traded Notes (ETNs)
There are many different types of volatility-based financial products to trade, and tax treatment varies. For example, CBOE Volatility Index (VIX) futures are taxed as Section 1256 contracts with lower 60/40 MTM tax rates. The NYSE-traded SVXY is an exchange-traded fund (ETF) taxed as a security.
The iPath S&P 500 VIX Short-Term Futures (VXX) is an exchange-traded note (ETN), and while tax treatment is similar to an ETF, there is uncertain tax treatment on ETNs. The default tax treatment is to treat many ETNs as “prepaid forward contracts,” with deferral of taxes until sale (realization) and long-term capital gains rates apply if held 12 months or longer. Prepaid forward contracts are not securities subject to Section 1091 wash sale loss adjustments and Section 475, if elected. Some ETNs, like VELOCITYSHARES 3X LNG NTRL GS ETN (UGAZ), are debt instruments taxed as securities. (Check the tax section of the ETN prospectus and read ETNs Have Different Structures With Varying Tax Treatment, and How To Avoid Tax Reporting Trouble With Exchange Traded Notes.)
CBOE-listed options on volatility ETFs structured as publicly-traded partnerships, and on volatility ETNs, are likely considered non-equity options with Section 1256 treatment. (See How To Apply Lower Tax Rates To Volatility Options.)
Nadex binary options
North American Derivatives Exchange (Nadex) offers binary options trading. While the IRS hasn’t delivered guidance on binary options yet, Nadex issued Form 1099-Bs (for 2015 and prior years) with coveted Section 1256 tax treatment (with lower 60/40 tax rates). We did extensive tax research on binary options, and we tend to disagree with Nadex. We think Nadex binary options may require ordinary gain or loss treatment like swap and forex tax treatment. Tax treatment on Nadex is unclear so consult us about it. If you have a large loss, you may prefer to use ordinary loss treatment rather than have a capital loss limitation with Section 1256 treatment. Read Tax Treatment For Nadex Binary Options.
The Dodd-Frank financial regulation law promised to clear private swap transactions on exchanges to protect the markets from another swap-induced financial meltdown — remember those credit default swaps with insufficient margin? When Dodd-Frank was enacted, traders’ hoped that clearing on futures exchanges would allow Section 1256 tax treatment. They were wrong: Congress and the IRS immediately communicated that Section 1256 would not apply to swap transactions, and they confirmed ordinary gain or loss treatment. Read Tax Treatment for Swaps, Options On Swaps, Futures Swaps, And Options On ETFs Partially Consisting Of Swaps. Swap contracts include Contracts For Difference (CFDs). (Read CFDs: Tax & Regulatory Treatment.)
For in-depth information on tax treatment for the above financial instruments, read Green’s 2018 Trader Tax Guide