How do I report section 988 (forex trading) losses

[RonnelP · Accepted solution]

By default, retail FOREX traders fall under Section 988, which covers short-term foreign exchange contracts like spot FOREX trades. Section 988 taxes FOREX gains and losses like ordinary income, which is at a higher rate than the capital gains tax for most earners. An advantage of Section 988 treatment is that any amount of ordinary income can be deducted as a loss, where only $3,000 in capital gains losses can be deducted. Section 988 gains or losses are reported on Form 6781.

Report the gains/losses in this way:

Federal taxes - Wages & income - I'll choose what I work on - Less common income - Misc income 1099-A 1099-C - Other reportable income

This default treatment of foreign currency gains is to treat it as ordinary income.

"Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be)."

I've included a link to the Internal Revenue Code for your reference:

http://www.law.cornell.edu/uscode/text/26/988

[bobliu123]

How do you send the support for the trades to the IRS?  I want to file the return through efile.  Or is support not necessary?  I have many, many trades.

[jbowler]

The suggestion doesn't work; there is no way to attach the statement the IRS requires.  I did actually do it this way last year and added the appropriate statement in supporting details, but this year I found that the statement doesn't get included in the return; it does not EVEN get included in the 'records' PDF.

Basically I think that you have to do a paper filing to include the statement, either that or find some other field that has got a supporting details statement that DOES get included and subvert that.

[jbowler]

Oh, and turbotax doesn't include form 8886 either, so if you are in the unfortunate position of suffering $50,000 or more of ForEx losses you are going to have to file by paper anyway; some salt for your wounds.

[wbraden3]

Other sources say sec 988 gain/loss is ordinary income. I have chosen to put it in line 21 of Form 1040 and omit Form 6781.

[RossCSC]

I use Turbotax premier desktop version 2022 version.  .You go to:

- Wages and income.

- Choose what to work on

- Less Common income / Miscellaneous Income, 1099A, 1099-c

- Then choose Other reportable income 

- Then choose Yes for any other wages

- then put in your Description and the gain or loss amount

[GeorgeM777]

When you get to the screen Miscellaneous Income, scroll to the bottom and select Other reportable income.  You don't want to enter wages so if you see a screen asking about wages you need to click the Back button and get to the screen where you can select Other reportable income.  You will be able to enter a negative number as well as a description of your loss.    

@RossCSC

[bean2401]

Thanks George, although do you have to include documentation supporting the miscellaneous income provided?

[DaveF1006]

No, but keep the documentation in case if the IRS does a routine examination on your return.

@bean2401 

[ruimarqu]

I have no issue with the federal return, my issue is to transfer this to my state return.

My Forex losses went under Less Common Income as a negative Miscellaneous number. The issue is when it transfers to my MA state return it goes under Form 1-NR/PY Income Worksheet line 11 as other income from Form 1099-MISC as a negative number. The software keeps giving me an error that this can not be a negative number. 

Is there another place to enter this negative loss on my MA return?

[GeorgeM777]

In the beginning of the MA section, you should see the screen Capital Gain/Loss Differences.  Selecting yes on that screen will take you to another screen that will give you the option to enter adjustments to your MA return.

@ruimarqu

[ruimarqu]

On the Federal return I choose the option to take it as an income deduction instead of a capital loss deduction. Do I still adjust it this way on the State?

[GeorgeM777]

It does not appear that MA allows an ordinary income deduction for forex losses unlike what you have on your federal return.  The situation might be different if you were in the business of forex trading in which case the loss would be reported on MA Schedule C.  MA Schedule B does allow for capital losses, so that appears to be the only place where you can claim your forex losses.  

@ruimarqu