[I]Continuation from previous post…[/I]
[B]Here is a good accounting solution for cash forex[/B]
Money managers report cash forex trading gains and losses using a �Performance Record Approach.�
These results are sufficient for tax authorities and reporting rates of return to investors. Use the same formula in a worksheet for your tax return. Here�s the formula to use on a worksheet template.
Ending net assets (at market value) less beginning net assets (at market value), less additions of cash, plus withdrawals of cash, equals net performance. Then subtract non-trading items like interest income, add interest expense and other expenses and you have net trading gains or losses on cash forex.
If you don�t elect out of IRC 988, then you report your ordinary gain or loss from cash forex as �other income� on Form 1040 (line 21).
If you elect out of IRC 988, add this amount to Form 6781 as �cash forex elected out of IRC 988.�
Your monthly statements may get you lost in the woods. If you try to figure out your cash forex gains and losses from your monthly brokerage statements you may get very confused and lost.
We have clients that have different statements for each type of currency (e.g. US dollars, Japanese Yen, Swiss Francs, and Euros) and it can become a nightmare scenario to try and figure it all out. The performance record approach is a salvation and it�s accepted by the IRS.
[B]My broker reported my cash forex along with my IRC 1256 contracts, is that ok?[/B]
A few brokers lump in cash forex in with IRC Section 1256 contracts on 1099 line 9 �aggregate profit or loss.�
This is technically incorrect by law, but it may save you taxes and an accounting headache.
Technically, cash forex are IRC 988 transactions and should be segregated from IRC 1256 contracts.
Perhaps, these brokers can argue that when you opened your cash forex account, you �contemporaneously� elected out of IRC 988 for IRC 1256 treatment, and that you qualify for such as a trader rather then a manufacturer type business.
You should consult with a trader tax expert if this case applies to you.
Also consider what happens if you have a large cash forex loss and you prefer ordinary loss treatment instead of Section 1256 treatment � so you don�t get stuck with the capital loss limitation of $3,000?
You face difficulty in overriding a broker�s 1099 treatment for 1256 contracts. Consult with a trader tax expert who may be able to help.
Cash forex is the �wild west� of trading and IRS reporting
Cash forex is not regulated by the CFTC and it has been called the �wild west� of trading.
Cash forex is also the wild west when it comes to taxes and reporting trading gains and losses.
There should be no 1099 reporting for cash forex, so you are your own sheriff when it comes to �rounding up� the gain and loss numbers and paying your taxes (with the nuances of IRC 988).
A person visited our booth at the Online Trading Expo in NYC and ask if cash forex was taxable at all? She heard that many cash forex traders claimed they don�t pay any taxes on their gains. We told her the IRS sheriff will catch up with them soon and throw the book at them for tax avoidance.
Remember, Form 1099 rules are minimum reporting guidelines set forth by the IRS. New products are being created all the time and it takes years for the IRS to set the guidelines for how each product is reported on Form 1099s, if at all. Brokerage firms tussle with the IRS each year on what they must report; as it causes great stress and cost on their accounting systems.
Many new and smaller cash forex brokerage firms have ramped up quickly to tap into the explosion of interest in cash forex � especially after the securities markets went into a bear spin a few years ago.
Many of these firms are not strong on reporting, systems or tax compliance, so you may be on your own when tax time comes.
Before you open a cash forex account, ask your brokerage firm what kind of reporting and support they offer you.
[B]Bottom line[/B]
Currency trading is a hot commodity in the market place, but not all currency contracts are taxed like commodities. Cash forex is subject to IRC section 988 rules and if you�re a trader, you can elect out of IRC 988, to be taxed like commodities � with beneficial 60/40 treatment. Before you start trading cash forex, find out if you brokerage firm will help you with trade accounting. If not, you may have a huge accounting headache on your hands come tax time. When it comes to currency trading, it�s wise to learn all the tax rules and consult with a trader tax expert.