Though this article attempts to address the multitude of issues that should be considered, I strongly advise anyone reading this article to consult with a tax advisor in order to ensure that their U.
Currency traders involved in the Forex spot cash market with a U. Under Section , US-based individual Forex traders have a considerable advantage over stock traders. Forex broker and profit from the fluctuation in foreign exchange rates as part of their normal course of business, fall under Section This means their gains and losses from foreign exchange, such as buying and selling of foreign goods, are treated as interest income or expense and get taxed accordingly.
Currency traders are also exposed to daily exchange rate fluctuations so technically their trading activity should also fall under the provisions of Section What does it mean to opt out? Basically, when you opt out you don't have to file anything with the IRS.
However you are required to keep an internal record in your own books about the fact that you are opting out of Section Many currency traders in the United States wait until after the year is over before filing in order to see if there have been any gains from their trading activities. If there are, they claim that they elected out of IRC to enjoy the beneficial Section treatment. If, on the other hand, the sum of the trades from cash Forex is negative, they remain with the traditional Section Under the current tax law, it is very difficult to disprove whether the trader made the election at the beginning or at the end of the year and the IRS has not yet begun to fully monitor this activity.
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