Guidance

The IRS has not issued any guidance on this issue, although informally IRS lawyers have spoken of the need for more consistent tax treatment of economically similar contracts, whether securities or commodities. The issue for any spot forex trader is whether there is sufficient authority to treat spot forex contracts (for which there is a regulated futures in that currency) as 60/40 contracts, provided the taxpayer has made a valid election to opt out of the normal Section 988 treatment of forex as ordinary.

Especially important is whether to make the Section 988 election, and if so, when, how and for how long. It is clear that the statutory rules are a hopeless antique (Ronald Reagan was in his first term of office when Section 988 was enacted). Modernization of those rules may be appropriate, but until that occurs, take these guidelines into consideration.