FOREX Tax Reporting with IB - Help

IB provides nothing to the IRS on Forex p/l or trades. Also, while they do show all trades done in FOREX for the year in the statements, there in no P/L at all. Just amounts and commish of the trades

So, for those trading Forex with IB...how in the world do you keep track of this? Do you have to record ever single trade and the conversion back into USD (if non-base currency)?

There HAS to be a better way or third party software to help in this.

I can't imagine a CTA with 100's of accounts trading cash Forex with IB and having to deal with this.

 

Green has a good, and recently updated, discussion of forex taxation at http://www.greencompany.com/EducationCenter/GTTRecCurrency.shtml

NB the last line, "If you don’t want any part of this uncertainty, trade currency <i>futures</i> instead."

 

I trade the futures right now, but will be moving to forex for bigger size. Thanks for the link, will read this weekend.

Curious if there are other forex brokers out there that can manage forex tax reporting better.

Seems to me with IB, the IRS will never know what, if any, profits are made in forex. It's the honor system, lol.

 

Pay attention to this self-filers.

Conversely, if you have cash forex trading losses, you may prefer ordinary loss treatment over Section 1256 capital loss treatment. As a result, you may not want to elect out of IRC section 988.
Note that IRC section 1256 losses may be carried back up to three tax years, but only against IRC section 1256 gains in the prior three tax years. Ordinary losses may offset any type of income. But, technically, it’s not a simple choice like this at the end of the year.

The rules require that you elect out of IRC section 988 on a “contemporaneous basis.” This means that hindsight is not allowed and you must make your decision in advance of the trades, before you know if you will have gains or losses.


Forex traders should consult a forex tax expert (such as our firm) for further discussion and decisions to make for tax reporting of their forex transactions. We also recommend that forex traders include a tax return footnote with their filing to explain this treatment.

To “elect out” of IRC section 988 or not, that’s the question
If you have cash forex trading gains, you will prefer to elect out of IRC section 988 to benefit from up to 12-percent lower tax rates on Section 1256 contracts.

 

And not only self-filers. If you have your taxes prepared by one of the retail chains, you're likely to surpass the expertise of the preparer you deal with.

 

I understand the IRS deal. What I am looking for/asking is from others who trade cash Forex with IB. How do you keep track of all your trades/conversions back to base/interest etc.

The only thing IB reports to us and the IRS is interest paid - interest received. So that is done. What is not done is listing any type of P/L to users nor the IRS for tax purposes.

 

I currently use Trade Log, it does a good job in downloading transactions. It calculates the gains and shows you in a list, where you can also change it around for specific time periods. It does also a good job, by figuring out your profit in your base currency which say is USD, when you make some profit in gbp. jpy. You have profit or loss in yen, but it'll convert it into your base currency. The only problem is sometimes you will have a lot balances in other currencies, so you may have phantom holdings that you will need to convert back into usd. Overall it's a good solution.

 

Thanks! I will look into Trade Log.

 

It's the honor system for stock transactions as well. Your broker only reports proceeds from sales, not your cost/basis in the stock that you need to compute P/L (although this will be changing for stocks purchased starting next year).

As for forex with IB, I do two things.

1) I record every forex transaction on my own spreadsheet. Yes, it's a lot of work (I'm over 9k lines this year) and it's complicated by the fact that commissions are paid in base currency which isn't necessarily the currency you are getting your forex profits in. But it helps me keep track of my trading results. This, however, isn't what I use for IRS reporting.

2) For tax reporting, I provide gross P/L on form 6781. This figure is roughly the same as shown on my spreadsheet but is calculated from my annual account statement that IB provides. Figures that go into my calculation include net purchases/sales of foreign currency, foreign stock purchases/sales, foreign stock dividends, USD commissions, opening and closing foreign currency balances, etc. Basically, anything that happened in the account related to foreign currency that isn't already reported elsewhere on my tax return.

The benefit of method 2 (from an accuracy standpoint) is that it takes into account changes in foreign currency that happen after a trade is completed. For example, say I buy AUD with borrowed NZD and have a profit of 1000 NZD after I close out the trade. Say this 1000 NZD is worth 700 USD, the amount recorded on my spreadsheet. But what happens to the 1000 NZD? Eventually it might be converted into USD when the rate is different than it was when I closed out the trade. So there's some additional P/L that won't show up as a trading profit.

I think the spreadsheet is probably good enough for tax purposes if you want to go that route. But I wouldn't submit it with my tax return. Just retain it in case questions are asked later.

Good luck!

 

I am using TradeMax, TradeMax can deal with your situation very well.
as for your forex problem, it auto convert your transaction from your trade currency into USD currency totally based on the up-to-date downloaded exchage rate, it also can generate a report you needed.