FOREX contracts and reporting requirements are governed by rules established in IRC Section 1256 and Section 988.

Section 1256 generally applies to foreign currency futures traded on U.S. exchanges, while other forex contracts fall by default under Section 988 – unless you opt out. More on that in a bit.
Under Section 1256, the IRS deems all long positions “sold” at the end of the year – whether or not they actually are – and marks profits or losses accordingly for tax purposes. The IRS uses the fair market value of the contracts as of the year-end to make the calculation.
Note: Per IRS Notice 2007-71, forex OTC options aren’t eligible for Section 1256 treatment. Section 1256 specifically refers to futures contracts, rather than options.
It’s up to you, however, to make the election. If you are trading in retail spot contracts or anything other than foreign currency futures contracts. the IRS will channel your trading into the Section 988 system. This is good if your trades were a net money loser: Treating your losses as ordinary losses, rather than capital losses, allows you to deduct your losses against any type of income. Caps on capital losses are removed, as long as you have other income to deduct them against.
Foreign currency gain or loss, defined.
For the purposes of Section 988, The term “foreign currency gain” means any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking date and before the payment date.
The term “foreign currency loss” means any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date.

Opting Out
If you want to opt out of Section 988, and take your chances with Section 1256 instead, you must commence a written record that you intend to opt out. You don’t have to file anything in advance with the IRS, strangely enough. You just have to create this written documentation before you start entering trades.
Now, there’s an opportunity to cut a corner here: Some traders might prepare an opt-out document at the beginning of the year, and then ‘disappear it’ if they have net losses, taking advantage of the higher loss deductions under Section 988. Thus far, the IRS has been strangely tolerant of this practice. We don’t expect that to continue indefinitely. As forex traders become a bigger and bigger piece of the investment world, and as forex traders increasingly become a ‘deep pocket for the IRS to pick, that particular opt-out provision is likely to come under increased scrutiny in the future. Here you can learn How to find opportunity in Forex.
When Should You Opt Out?
When you believe your trading will be profitable, of course! By electing to have the IRS assess taxes based on Section 1256, you will benefit from a 60/40 allocation of long-term and short-term capital gains. That is, 60 percent of your gains will be taxed as long-term capital gains, while 40 percent of your trade will be taxed as short-term capital gains.
This is strongly preferable to treating profitable trading under Section 998, since if you are an active trader, all or nearly all your trades are likely to fall under the higher short-term capital gains tax.
To Take the 1256 Treatment
To take the 1256 treatment, you would file an IRS Form 6781 – Gains and Losses from Section 1256 Contracts and Straddles, in conjunction with the opt-out election document described above.

section 988 is reported on schedule 1 line 21

sec 988 gets reported on schedule 1 line 21

sec 1256 gets reported on form 6781