Currency trading has enjoyed a huge surge in popularity recently, as online forex brokerages have popped up everywhere, piquing traders’ interest in the round-the-clock forex market.

There are two ways to trade foreign currencies, and they have very different tax liabilities.

On the one hand, you can trade currency futures, such as those offered on the Chicago Mercantile Exchange.

Currency futures (otherwise known as “regulated futures contracts,” or RFCs) are considered Internal Revenue Code (IRC) section 1256 contracts and are taxed like other futures.

However, if you trade the “cash” (forex) market, an entirely separate set of rules applies, because forex trades (otherwise known as “foreign current contracts,” or FCC) are considered IRC section 988 contracts.

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