{"id":7333,"date":"2023-07-21T04:22:52","date_gmt":"2023-07-21T04:22:52","guid":{"rendered":"https:\/\/www.irstaxapp.com\/?p=7333"},"modified":"2023-07-21T04:23:28","modified_gmt":"2023-07-21T04:23:28","slug":"tax-on-forex-trades","status":"publish","type":"post","link":"https:\/\/www.irstaxapp.com\/tax-on-forex-trades\/","title":{"rendered":"Tax on FOREX Trades Under US Tax law: What Every Trader Must Know!"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large\"><picture><source srcset=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-1024x576.webp 1024w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-300x169.webp 300w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-768x432.webp 768w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-150x84.webp 150w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-750x422.webp 750w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-1140x641.webp 1140w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss.webp 1280w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" type=\"image\/webp\"><img src=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-1024x576.png\" height=\"576\" width=\"1024\" srcset=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-1024x576.png 1024w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-300x169.png 300w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-768x432.png 768w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-150x84.png 150w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-750x422.png 750w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss-1140x641.png 1140w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/07\/forex-trade-gain-loss.png 1280w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" class=\"wp-image-7334 sp-no-webp\" alt=\"tax on forex\n\" decoding=\"async\" loading=\"lazy\"  > <\/picture><\/figure>\n\n\n\n<p>The rule for <strong><em>tax on forex<\/em><\/strong> trades in the United States can be a complex affair as these transactions are subject to various tax rules codified under the Internal Revenue Code (IRC) and interpreted through Revenue Rulings by the Internal Revenue Service (IRS).\u00a0<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_62 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-662d883f17b30\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-662d883f17b30\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.irstaxapp.com\/tax-on-forex-trades\/#Treatment_of_Certain_Foreign_Currency_Transactions\" title=\"Treatment of Certain Foreign Currency Transactions\">Treatment of Certain Foreign Currency Transactions<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.irstaxapp.com\/tax-on-forex-trades\/#What_is_the_6040_Rule_of_Tax_on_Forex_Trade\" title=\"What is the 60\/40 Rule of Tax on Forex Trade?\">What is the 60\/40 Rule of Tax on Forex Trade?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.irstaxapp.com\/tax-on-forex-trades\/#Special_Rule_for_Spot_Transactions_Tax_on_Forex_Trades\" title=\"Special Rule for Spot Transactions Tax on Forex Trades\">Special Rule for Spot Transactions Tax on Forex Trades<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.irstaxapp.com\/tax-on-forex-trades\/#How_is_Mark-to-Market_Taxation_Accounting_Done\" title=\"How is Mark-to-Market Taxation Accounting Done?\">How is Mark-to-Market Taxation Accounting Done?<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Treatment_of_Certain_Foreign_Currency_Transactions\"><\/span><strong>Treatment of Certain Foreign Currency Transactions<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If you trade in foreign currency, gains or losses on such trades are generally treated as ordinary income or loss and are reported on Form 1040 Schedule 1. This is as per&nbsp;&nbsp;<a target=\"_blank\" href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/988\" rel=\"noreferrer noopener\">IRC Section 988<\/a>,<\/p>\n\n\n\n<p>However, some traders may qualify to opt out of this ordinary income or loss treatment by making a capital gains election. With this election, the Section 988 ordinary gain or loss treatment is overridden, and the capital gains rules of IRC Section 1256 will apply instead.<\/p>\n\n\n\n<p>To apply Section 1256 for forex trading, a trader must qualify as a &#8220;trader in securities,&#8221; and the trade must be made in a regulated futures contract market, among other requirements. Hence, not all forex trades can qualify for this treatment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_6040_Rule_of_Tax_on_Forex_Trade\"><\/span><strong>What is the 60\/40 Rule of Tax on Forex Trade?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/1256\" target=\"_blank\" rel=\"noreferrer noopener\">IRC Section 1256<\/a>\u00a0provides beneficial tax treatment for certain financial transactions, including regulated futures contracts and foreign currency contracts. Here, 60% of gains or losses are treated as <a href=\"https:\/\/www.irstaxapp.com\/capital-gains-tax-calculator\/\">long-term gains<\/a> or losses, and 40% as short-term.\u00a0<\/p>\n\n\n\n<p>The maximum <a href=\"https:\/\/www.irstaxapp.com\/irs-tax-rates-2023\/\">tax rate on long-term capital gains<\/a> is 20% (or 0% or 15%, depending on your income), whereas short-term capital gains are taxed at your ordinary income tax rate.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Special_Rule_for_Spot_Transactions_Tax_on_Forex_Trades\"><\/span><strong>Special Rule for Spot Transactions Tax on Forex Trades<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A key Revenue Ruling relevant to forex traders is\u00a0<a href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/rr-08-05.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">Revenue Ruling 2008-5<\/a>, which guides the tax treatment of &#8220;<em><strong>spot forex trades<\/strong><\/em>&#8220;. According to this ruling, if a forex spot transaction settles within two days, it can qualify as a Section 988 transaction.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-background\" style=\"background-color:#ceebfd\"><em>A spot transaction in forex trading is a contract to buy or sell a certain amount of a foreign currency at the current market price, with the transaction settlement (i.e., the physical exchange of the currencies) taking place within a short period, typically two business days after the trade is executed. For example, if a U.S. company needed to purchase goods from a European supplier, they might enter a spot transaction to buy euros with U.S. dollars. If the current EUR\/USD exchange rate is 1.20, and the company needed to pay \u20ac10,000 for the goods, they would use a spot transaction to buy \u20ac10,000 for $12,000 (10,000 * 1.20). The company would have the euros they need to pay their supplier two business days later.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_is_Mark-to-Market_Taxation_Accounting_Done\"><\/span><strong>How is Mark-to-Market Taxation Accounting Done?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Moreover,\u00a0<a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/475\" target=\"_blank\" rel=\"noreferrer noopener\">IRC Section 475<\/a>\u00a0applies to traders who elect for mark-to-market (MTM) accounting. A forex trader with trader tax status (TTS), can make a Section 475 MTM election, which allows them to count all their trading gains and losses as ordinary gains and losses, not subject to the wash-sale loss adjustments. However, to qualify for TTS, a trader must satisfy certain conditions. These conditions usually involve the trading activity&#8217;s frequency, volume, and continuity, among other factors.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What is Mark-to-Market accounting?<\/h3>\n\n\n\n<p class=\"has-background\" style=\"background-color:#fbebbe\">Mark-to-market (MTM) is an accounting method that values an asset, portfolio or account at its current market price instead of an assumed book value. An asset\u2019s mark-to-market value reveals how much a company gets if it sells it then. It gives an almost correct view of gain or loss at a particular time.<\/p>\n\n\n\n<p>Overall, the <strong>tax on FOREX<\/strong> trades in the U.S. involves various IRC provisions and IRS Revenue Rulings. It is essential for traders to understand the tax implications of their trading activities and to seek the advice of tax professionals when necessary.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The rule for tax on forex trades in the United States can be a complex affair as these transactions are subject to various tax rules codified under the Internal Revenue Code (IRC) and interpreted through Revenue Rulings by the Internal Revenue Service (IRS).\u00a0 Treatment of Certain Foreign Currency Transactions If you trade in foreign currency, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":7334,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[54],"tags":[],"amp_enabled":false,"_links":{"self":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/7333"}],"collection":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/comments?post=7333"}],"version-history":[{"count":1,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/7333\/revisions"}],"predecessor-version":[{"id":7335,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/7333\/revisions\/7335"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/media\/7334"}],"wp:attachment":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/media?parent=7333"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/categories?post=7333"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/tags?post=7333"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}