For tax purposes, forex options and futures contracts are considered IRC Section 1256 contracts, which are subject to a 60/40 tax consideration. In other words, 60% of gains or losses are counted as long-term capital gains or losses, and the remaining 40% is counted as short term. But I understand that you're not trading futures or options.
Most spot traders are taxed according to IRC Section 988 contracts, which are for foreign exchange transactions settled within two days, making them open to treatment as ordinary losses and gains. If you trade spot forex, you will likely be grouped in this category as a "988 trader." If you experience net losses through your year-end trading, being categorized as a "988 trader" is a substantial benefit. As in the 1,256 contract category, you can count all of your losses as "ordinary losses," not just the first $3,000.
Now comes the tricky part: Deciding how to file taxes for your situation. While options or futures and OTC are grouped separately, the investor can choose to trade as either 1256 or 988. Individuals must decide which to use by the first day of the calendar year.
Form 6781 is used to report:
- Any gain or loss on section 1256 contracts under the mark-to-market rules.
- Gains and losses under section 1092 from straddle positions.
Therefor whether or not you need this form depends on the whether you decided to file as a 988 or 1256 trader.
Answers are correct to the best of my ability but do not constitute legal or tax advice.
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