Forex

Forex traders may know that there is a tax benefit in trading forex over stocks. Most beginning forex traders who have barely scratched the surface of trading are now confronted with a new challenge riddled with rules and regulations, filing their taxes.

Keep the following in mind as you read
* If you trade as a business entity, the information found in this post may not fully apply to your tax situation.
* This post assumes that you trade as an individual without Trader’s Tax Status. By default, the IRS defines you as an “Investor,” not a “Trader.” There are special advantages to being a Trader that an Investor does not have such as deducting office expenses used for your trading business. That information is not covered here. Please note that if you are an individual forex trader and hold a full time job, you will automate fail to qualify as a Trader.
What kind of “Forex” are you trading?

This question seems trivial, but is actually a very critical piece of information needed to determine how your gains or losses are taxed. Currency trading occurs in two ways, on a regulated exchange and an unregulated market.

On a regulated exchange, currency contracts are treated as futures and commodities, known as IRC section 1256 contract. Think of “regulated” as describing the trading done at the New York Stock Exchange.

When trading on the unregulated interbank forex market, you are trading an IRC section 988 contract. This is what most of us are trading, especially if you trade via a retail broker such as Oanda, FXCM, and nearly all brokers that use the Metatrader4 platform.