Wild, wild west

For years, forex market regulation was scarce and fraud was rampant. While the industry has cleaned itself up to a certain extent, the FX market is still the Wild West when it comes to taxes.

As mentioned, in most cases there is no reporting of forex gains or losses on a Form 1099, so it’s up to you to gather your own information.

Remember, Form 1099 rules are minimum reporting guidelines set forth by the IRS. New products are constantly being created, and it takes years for the IRS to set guidelines for how each product should be reported. Brokerage firms tussle with the IRS each year on what they must report, as all the changes cause great stress and cost on their accounting systems. Many new and smaller forex brokerages have grown quickly to take advantage of the explosion of interest in cash forex especially after the stock markets went into a bear spin a few years ago. However, 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 forex account, ask your brokerage firm what kind of reporting and support they offer you.

Currency trading is a hot commodity, but not all currency contracts are taxed like commodities. Forex is subject to IRC section 988 rules and, if you’re a trader, you can elect out of IRC 988 and gain 60/40 tax treatment.

Before you begin trading forex, find out if your brokerage firm will help you with trade accounting. If not, you may have a huge accounting headache on your hands come tax time.