Good evening and hello again, David 2023.
You asked the followimg additional questions:
"if brokers are unregulated, they do not fulfill regulatory filing requirements)? I would think that if they aren't reporting trades people make, all profit/loss is not recognized as a tax event for 988 or 1256 election..."
You are correct that many Forex brokers are not required to provide a 1099-B form, you are still expected to keep accurate records and report all of your trading activity to the IRS. Afterall, the IRS does require all residents and citizens of the US, to report all worldwide income.
Forex traders usually fall into Section 988 or Section 1256.
- Section 988 This is the default section that most Forex traders will fall into. As such, these gains and losses are considered ordinary income, and are taxed at your normal tax rate.
- Section 1256 Forex traders may also qualify for a considerably lower tax rate. To opt-out of the Section 988 tax, you need to make an internal note in your books and file the change with your accountant. Profits under this type are treated as capita gains/losses and are taxed as 60% long-term and 40% short-term.
In regards to the two specific examples you gave, yes, you are correct!
As the formula for calculating gains and losses in your first example would be:
- Capital Gain = FMV at the time of sale - cost basis
The formula for calculating gains and losses as in your second example, where it was gifted to you can be a little more complicated as your cost basis can vary depending on the specifics of one's situation.
- If the value of your gift has gone up since you received it, your cost basis is equal to the gift giver’s cast basis, which is the fair market value when the gift giver originally received it.
- If the value of your cryptocurrency gift has gone up since you originally received it, but is still lower than the gift giver’s original cost basis. Then there would be no capital gain or loss to be reported.
- If the value of your gift has gone down since you received it, your basis is equal to whichever is lower: the gift giver’s cost basis, or the fair market value of the crypto at the time the gift was given.
Here are a couple links that you may find helpful:
Hopefully this helps!
Thanks again, for joining us again today!
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Terri Lynn
