Newbie: US Tax Treatment of Forex Trades

Discussion in 'Forex' started by Shmulik28, Mar 3, 2004.

  1. I'm just starting my education process into Forex and I was wondering how Forex trades are dealt with under US tax laws. Mainly, let's say I want to focus first on EUR/USD pairs (using an Mini-Forex account to get my feet wet and make sure my money management skills are in place before raising the stakes). Now if I make say, 8-10 flips a day, and assuming since I'm new my poor success ratio will be 2 positives against 8 lossing positions, how are these managed for tax reporting.

    With stocks, there is the 30 day wash rule, where I can't claim the loss if I re-enter the same instrument less than 30 days after I closed out the losing position. Is there anything like this in existence for Forex trades?, or do I just sum up the winners and losers and report a short term capital gain/loss on the grand total of all my trades for each currency pair traded?

  2. Idoogye


    I'm just now getting interested in trading Forex myself. This is an excellent question. I've seen something on the subject recently, but can't recall if it was here or on the forum. IIRC, for US tax reporting purposes, forex trades are treated like regulated futures contracts (Section 1256).

    If I haven't recalled correctly, there are a number of elite traders who already know forex, and no doubt one or more of them will be so kind as to correct me on this. :)
  3. Idoogye,

    Thanks for your response, now to show how stupid I really am, could you give me the gist on "regulated futures contracts (Section 1256)."

  4. Idoogye


    No worries, mate. You're not stupid, you just haven't traded "commodities" before. You're smart to ask!

    You need to go to the IRS website and read Publication 550 (deals with investment income), specifically "Section 1256 Mark-to-Market" rules. Here, I'll make it easy for ya:

    BTW, I was right. Forex trading results are reported on IRS Form 6781, "Gains and Losses from Section 1256 Contracts and Straddles". You'll begin to understand it all when you've read the instructions...

    Erm...well, on second thought better consult your tax advisor. :D
  5. Idoogye,

    Thanks a million (now is that in USD, AUD, or ...)!
  6. Idoogye


    All currencies gratefully accepted. Also Visa, Mastercard, PayPal... :D :D