IRS.. difference between getting paid interest to your balance vs. rollover to price

Discussion in 'Forex' started by ElectricSavant, Dec 6, 2005.

  1. IRS.. difference between getting paid interest to your balance vs. rollover to price?

    Is it treated differently between different Dealer/Marketmaker methods for USA taxpayers?

    Michael B.
  2. Electric,

    Have you seen this essential guide for US forex and futures traders from last year's (April 2004) Futures magazine?

    Let me quote a key part, just in case.


    "Here is a good accounting solution for cash forex

    Money managers report cash forex trading gains and losses using a “Performance Record Approach.”

    These results are sufficient for tax authorities and reporting rates of return to investors. Use the same formula in a worksheet for your tax return. Here’s the formula to use on a worksheet template.

    Ending net assets (at market value) less beginning net assets (at market value), less additions of cash, plus withdrawals of cash, equals net performance. Subtract non-trading items such as interest income, add interest expense and other expenses and you have net trading gains or losses on cash forex.

    If you don’t elect out of IRC 988, you report your ordinary gain or loss from cash forex as “other income” on Form 1040 (line 21).

    If you elect out of IRC 988, add this amount to Form 6781 as “cash forex elected out of IRC 988.”

    Your monthly statements may get you lost in the woods. If you try to figure out your cash forex gains and losses from your monthly brokerage statements, you may get very confused and lost.
    We have clients that have different statements for each type of currency (e.g., U.S. dollars, Japanese yen, Swiss francs and Euros) and it can become a nightmare scenario to try and figure it all out. The performance record approach is a salvation and it’s accepted by the IRS."


    Note especially the 3rd paragraph above, describing the formula. Now, I am no tax expert, but, having studied Robert Green's 2005 book "The Tax Guide for Traders" (highly recommended, BTW), here's how I would answer your question. Hypothetically, if you somehow managed to execute the same forex trades (relatively short-term) at more than one dealer, your bottom-line federal tax should be nearly the same between the 2 types of forex dealers you mention. Differences would be due solely to the variations in interest debit / credit rates themselves, whether explicit or implicit.

    However, the (very simple) computation required to get there will be different on your part.

    In the first case, explicit interest dealer, you need to deduct the net annual interest (= credit - debit) from the yearly NAV change. As you know (but others may not), Oanda, for one, sends out ONLY a 1099-INT to you and the IRS; there is NO 1099; it's up to the trader to compute from the annual statement and self-report, based on an honor system, the NAV change on your tax return to the IRS.

    In the second case, price adjusting dealer, unless you get a 1099-INT, you don't deduct anything from the yearly NAV change. Note that I have not had first-hand experience with such a dealer, so this part is just my attempt at a logical interpretation. Of course, the lovely body of work affectionately known as the IRC (Internal Revenue Code) can, shockingly, on rare occasions, be less than logical...
  3. No I get the 1099-int...which is substantial in my carry trades...I actually get paid interest second-by-second from my dealer/market maker and on my carry trades I get it paid daily.

    How do those other Dealer/Market makers handle it that do not do this but adjust the price instead. Do they call it interest and send a 1099-int to me and my partner the IRS?

    I have elected correctly my bookkeeping records to allow for the futures-simular treatment of retail spot forecx currencies.

    Michael B.
  4. Yeah, I know that you get a 1099-INT. Oanda case is specifically addressed in the penultimate paragraph of my first reply. Not sure what your point is here.

    The other case is addressed in the last paragraph of my first reply. By saying that I had no first-hand experience with such dealers, I was hoping that someone reading this would pipe in and tell us whether they get a 1099-INT or not.

    Yes, absolutely. Every single US forex trader who has or expects to have a gain for the year, should (internally) elect out of Sec. 988, to benefit from the 60/40 long-term (15%) / short-term (up to 35%) tax treatment, exactly like futures. That gets you a marginal federal blended rate of 23% vs. 35%.

    Conversely, those with a forex trading loss over $3,000 should, in most cases, stick with the default Sec. 988 (as in do nothing, election-wise). This allows them to benefit from the unlimited ordinary loss deduction against any other income, rather than the $3,000 annual capital loss limit, with futures. This is one nice, little-known advantage, a "silver lining" of cash forex over currency futures, especially for newcomers to currency / forex trading who have other income.
  5. Another problem I have, is if its interest earned at all those other dealer/marketmakers, then those traders get a 1099-int but they do not realize the interest until they liquidate.

    This really is the wild west of Forex!

    Michael B.

    P.S. I think IB and Oanda are the only ones doing this correctly, and as far as profitable Retail Spot Forex traders and their taxes...well.....

    P.P.S. All I know is if I get a I better report it to my partner the IRS...or their computer will spit out a nice little bill to me...I pay my taxes quarterly to avoid these extra charges.
  6. Mike, move down here to Puerto Rico. Then it all becomes "forgetable". :)
  7. :)

  8. Not if I'm a US citizen, right? ;)
  9. Surdo


    NO, PR has a seperate US federal Tax code.
  10. Everyone down here is a US citizen (practically). Puerto Ricans all have US passports. They just don't pay the IRS, they pay what's called "municipality" taxes. Tons of loopholes.
    #10     Dec 7, 2005