Forex income tax strategies

[RJo]

Hi, all. I created this topic for everyone to post their forex income tax strategies. I start things off by posting my own:

I am in the United States.

In 2021, I learned that I could choose between IRS Code Section 988 versus Section 1256 for purposes of taxation of forex gains and losses. 988 would allow me to deduct all of my losses but tax all of my gains based on my usual personal tax bracket. In contrast, 1256 would allow me to deduct only $3000 of my losses but give me a 60/40 split as to my gains, i.e., 60% of my gains taxed as capital gains and the remaining 40% of my gains taxed based on my usual personal tax bracket. Based on my annually profitable demo trading in 2021, I selected Section 1256.

Why did I select Section 1256 while I was paper trading in a demo account? (a) Because I learned that Section 1256 states that I must "internally" document my opt-out of Section 988, and (b) that I must sign that document prior to January 1st of the trading year. This means that although I did not have to file the document to the IRS at that time, I must sign and retain that document for potential attachment to my 2022 tax return, or for production to the IRS in the event of an audit. Obviously, I anticipated going live in 2022, and my capital gains tax rate was substantially lower than my usual personal tax rate.

A copy of my internal document, redacted of sensitive information, is attached to this post.

LEGAL DISCLAIMER: Nothing in this topic nor in this post may be construed as legal advice nor tax advice. I am not a licensed attorney nor a certified public accountant. If you have concerns or questions regarding your specific tax situation, you should consult a licensed professional.

[RJo]

And published by IG U.S. Support regarding 988 and 1256...

https://www.ig.com/us/help-and-support/accounts-and-statements/my-accounts/tax-information

[RJo]

Good news... The U.S. IRS accepted my filed tax return which included a 60/40 tax rate split. Many thanks to IG and Investopedia for having identified the tax issues to research and/or on which to seek professional guidance.

FYI, I used the online IRS Free File portal and selected FreeTaxUSA as the service provider. This is not an endorsement. I simply used the first free one that included investment income and free state filing for my personal income level.

[RJo]

Update... State accepted my tax return too.