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.
Here is how to report in TurboTax:
in Federal taxes
under Wages & income tab
scroll to Less common income - Misc income 1099-A 1099-C
Click 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)."
See this link for more information:
http://www.law.cornell.edu/uscode/text/26/988
