Tax Treatment for Forex Traders
Forex traders will have earnings and losses from Forex trading. Seeking the advice and/or services of a tax
professional is important to get the best advice about how to handle your particular situation. However, there
are some tips that can reduce the unknowns in what Forex traders can expect at tax time. Use the tips below to
organize your Forex transactions to reduce stress during tax season.
Records you will have to clarify your financial position regarding your Forex trading are important for
your You will not always receive a 1099 from your Forex broker but you will still have statements and other
paperwork itemizing your transactions for the year in Forex trading. This can be fairly simple for some Forex
traders and extremely detailed for more active traders, especially those who engage in scalping which can
involve transactions that last for less than a minute.
Determine whether you have overall losses or gains. This determination is made both for those positions you've
sold and either made or lost actual money at, in other words realized a gain or loss for, as well as for
your positions where you have not yet sold but that have value that reflects a total gain or loss as of
the of the year which will be your unrealized gains or losses.
Two sections of the Internal Revenue Code are most frequently cited regarding Forex trading, Section 1256 and
Section 988. The advice you will get regarding using either of these sections is frequently determined based
on whether you lost or earned money during the course of the year.
Section 1256 is often cited as the better section for Forex traders who earned money during the year because
it provides for handling profits under the 60/40 rule which means that 60 percent gets a lower capital gains
tax rate and 40 percent gets a higher income taxation rate. Obviously eligibility for this treatment
will taxes for a Forex trader who otherwise would be paying regular income tax rates on his or her earnings.
Section 988 is often the desirable section of the tax code used for individuals who had losses in the Forex
trading arena. The basic provision of Section 988 used to justify this preference is that there is no
limitation under Section 988. Under Section 1256 losses are limited to $3,000.00. Section 988 has a feature
that requires taxpayers to elect out of 988 if they don't plan to use that section for reporting gains
Another significant difference between Section 1256 and Section 988 is that under Section 988 only realized
gains and losses are reported. Under 1256 unrealized gains and losses are also required to be reported to the
Forex trading has gained more government attention in response to the increased numbers of individuals
involved in Forex trading. A professional tax adviser's services are the best course of action for Forex
traders hoping to comply with the law and to get the best tax treatment for their earnings and losses. Use
the above to know generally about what to expect when you speak to your tax adviser.