 Home » Trendlines » Ask Our Expert » Past Q&A » Are Forex trading losses tax deductable?
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 I am wondering if Forex
losses are deductable on income taxes. I have been trading for years and have never
had an overall loss for a year, but one of my students had a loss for 2008 and is
asking me if it can be deducted and I have no idea. Do you know? And, if so, how
should it be entered on a tax return?
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-Mindy, USA
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 Thanks
for your question, Mindy. Currency traders involved in the Forex spot (cash) market,
can choose to be taxed under the same tax rules as regular commodities [IRC (Internal
Revenue Code) Section 1256 contracts] or under the special rules of IRC Section
988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies
to cash forex unless the trader elects to opt out.
Under Section 1256, Forex traders can have a significant advantage over stock traders.
By reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts
and Straddles), forex traders are allowed to split their capital gains on
Schedule D using a 60% - 40% split. This means that 60% of the capital gains are
taxed at the lower, long-term capital gains rate (currently 15%) and the remaining
40% at the ordinary or short-term capital gains rate, which depends on the tax bracket
the trader falls under (as high as 35%). This results in an average rate of 23%,
which is 12% less than the regular (short-term) rate.
Forex traders should receive 1099 forms from their US-based broker at the end of
the year like stock and futures traders do. No matter in what country your forex
broker is based or what tax-related reports they provide, you could pull up reports
online from your accounts and seek the help of a tax professional. No matter what
you decide to do, don't fall into the temptation of lumping your trades with your
section 1256 activity (if any). Forex transactions need to be separated into Section
988 reporting.
Hope this was helpful.
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-Tom, ForexTurtle USA
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