Many forex traders are active in both markets. Because futures and cash forex are subject to different tax and accounting rules, it is important for forex traders to know which category each of their trades fall into so that each trade can be reported correctly to receive optimum tax advantage. Section 988: To Opt Out or Not? Section 988 was enacted as a way for the IRS to tax companies that earn income from fluctuations in foreign currency exchange rates as part of their normal course of business, such as buying foreign goods. Because forex futures do not trade in actual currencies, they do not fall under the special rules of Section 988. But as a currency trader, you are exposed daily to currency rate fluctuations, hence your trading activity would fall under the Section 988 provisions.
40 split for these gains under Section 1256. IRS to crack down, at least so far. If you have losses however, you may prefer to remain under Section 988’s ordinary loss treatment rather than the less favorable treatment under Section 1256. IRS Form 1099, on which their aggregate profit or loss is listed on Line 9.