You trade the beans and we'll count them |
Currency futures are another form of futures trading - see our Futures trader page for some definitions. As such, they fall under the category of "Section 1256 contracts", with some special rules.
By default, foreign currency transactions are taxed as ordinary income, because they fall under IRC 988.
A trader needs to specifically elect out of the IRC 988 treatment, to gain the preferential tax treatment of the default Section 1256 contracts.
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Foreign Currency Contract
This is a contract that:
1. Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency),
2. Is traded in the interbank market, and
3. Is entered into at arm's length at a price determined by reference to the price in the interbank market.
Bank forward contracts with maturity dates that are longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied.
Special rules apply to certain foreign currency transactions. These transactions may result in ordinary gain or loss treatment. For details, see Internal Revenue Code section 988 and Regulations sections 1.988-1(a)(7) and 1.988-3.
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