Before you enter your foreign currency transactions, you must determine whether the gain or (loss) is subject to IRC (Internal Revenue Code) 1256 or 988. If you are unsure how to classify your trades, it is best to seek professional tax advice from your broker or a tax attorney.
By default, Cash Forex is subject to IRC 988 rules with ordinary gain or (loss) treatment. However, if you are a trader, you can elect out of IRC 988. This will allow your gains to be treated as IRC 1256 with beneficial 60/40 capital gain treatment. The election out of IRC 988 is an internal election. This means you should document the election in your own records before you make the trades.
IRC 988:
If you did NOT elect out of IRC 988, the gain or (loss) would be subject to IRC 988. You would enter the information on Schedule 1 (Form 1040) Additional Income and Adjustments to Income, Line 8 as an ordinary gain or (loss).
To enter a description and an amount for Schedule 1 (Form 1040), Line 8:
- From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
- Click Other Income in the Federal Quick Q&A Topics menu to expand, then click Prizes, awards or other miscellaneous income.
- Continue with the interview process to enter all of the appropriate information.
- On the screen titled Miscellaneous - Amounts Received, enter a Description and an amount, then click Continue.
Additionally, although it is not required, you may wish to follow the steps outlined below to enter additional information about the contracts.
- From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
- Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Futures or foreign currency contract reporting (Form 6781).
- Continue with the interview process to enter all of the appropriate information.
- On the screen titled Form 6781 - Elections, check Election under section 988, then click Continue.
- On the screen titled Form 6781 - Contracts and Straddles, enter the informational statement as outlined on the screen, then click Continue.
- On the second screen titled Form 6781 - Contracts and Straddles, enter the Name of the Contract, the Election type (such as "IRC 988"), the Amount, and the Form reference (such as "Schedule 1 (Form 1040), Line 8"). Click Add More for any additional information as needed, then click Continue.
The information entered here will be submitted with the return; however, do not affect any of the calculations on the return. Only the amount entered as Other Income (first set of navigation steps above) will be used in the return's calculations.
IRC 1256:
If you DID elect out of IRC 988, the gain or (loss) would be subject to IRC 1256. You would enter the information on Form 6781 Gains and Losses From Section 1256 Contracts and Straddles, Part I, and it would be subject to the 60/40 capital gains treatment.
To enter information for Form 6781 in your TaxAct return:
- From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
- Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Futures or foreign currency contract reporting (Form 6781).
- Continue with the interview process to enter all of the appropriate information.
- On the screen titled Form 6781 - Elections, clear/uncheck Election under section 988, then click Continue.
Based on the information entered, the appropriate calculations will be done on Form 6781 so that 40% of the gain or loss is reported as short-term on Line 8 and 60% of the gain or loss is reported as long-term on Line 9 of the form. These amounts are then transferred to the appropriate line(s) on Schedule D (Form 1040) Capital Gains and Losses.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.
