Hi all,

Had a question. I use to work for a trading company last year and will be receiving a schedule K1 from them with a $6000 ordinary loss. Now do I file this using a schedule E or C ?

I have a full time day job and usually end up in the 25/28% bracket.

I started trading micro and mini in 2009 and hope to profit $500 to $1000 per month... pips willing.

How much $$ do you need to be making/losing to make it worthwhile for a consultation with a tax adviser that understands forex?

Ok, so I have some forex losses this year and in preparing my tax return in Turbo Tax I came across this irc 988 and irc 1256. From my research, i understand the default is to report any gains/losses under irc 988 unless you opt out of it into irc 1256 to take advantage of the 60/40 (assuming you have gains). Well, I have losses, so it would be more beneficial for me to report them under irc 988 as the losses are not limited to $3000 as they would be under irc 1256 (i have greater than $3000 in losses).

My issue is that I wasn't aware of irc 988 and irc 1256 last year and I had losses (greater than $3000) LAST year which i reported on form 6781 under 1256 contracts which limited my losses to $3000. Now i'm learning that I THINK I could have put them on line 21 on form 1040 and netted the entire loss against my ordinary income. So, my questions are:

1. Can I amend my 2007 tax return to report them under irc 988 instead of 1256, and if so, how do I amend it?

2. I'm reading thta you're supposed to determine beforehand if you are going to elect under 988 or 1256 before you start trading FX, and send yourself and INTERNAL memo stating which one you want to elect under. But I was not aware of these tax codes before trading, and just learning them now, so what can i do about that in regard to amending my 2007 tax return (if i am even able to)

3. For this year's return, can I just exclude form 6781, and just put the losses on line 21 of form 1040? Do i need any supporting documentation? I do have a 1099-b, so the IRS should have that info too right?

Any help would be appreciated. Thanks!

If you never opted out of Section 988 into Section 1256 in a prior (open) tax year, and if you inadvertently and erroneously reported the forex transactions as capital gain or loss (60/40 or otherwise), then you can amend your tax return to fix this. Explain it in the 1040X.

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If you have a K-1 ordinary loss (line 1), it generally goes to Schedule E. Trading companies are non-passive activities on Sch E too.

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Hi GreenTrader Tax,
Thanks for your response. I did read through your lengthy but very through explanations on your website regarding 988 and 1256. In it, you discuss that you are to elect which section you want to report under BEFORE you start trading forex (which I had no clue about), rather than after-the-fact in hindsight, otherwise you will always pick the appropriate section to your advantage based on whether you had a gain or a loss. So, I never did that, so if I ammend my return, can the IRS come back to me and say that I need to prove that I elected under 988 before I started trading fx (which I have no proof of), or do I just put a note saying I inadvertently report them under cap gain/loss and I am electing under 988?

Also, do I need to have any back-up documentation? I DID receive a 1099-B in both 2007 and 2008, so they should have that already right, so I don't gather I need to provide any back-up except an explanation as to why I'm ammending my return.

Thanks in advance for any advice.

P.S. What do you mean by a prior (OPEN) tax year? <--what do you mean by "open"

Also, if I amend my 2007 return to report the losses under section 988 instead of section 1256, that will change my loss carryforward (from other stock losses in prior years) on my 2007 return which will affect my 2008 return, so I gather that I have to amend my 2007 return FIRST, and then use that amended return to prepare my 2008 return. Is that correct? And can I send them together (2007 amended and 2008 return) in the same envelope? Thanks for any help.

Hi GreenTrader Tax,

If have large capital loss carryovers(from equities) and in 2009 If I have Spot Forex gains, Am I right in saying that I can offset the capital loss carryovers with forex gains? If so when do I need to capital gains/loss election and how? Thank you very much for your time in advance.

If a trader filed the capital gains election internally (and in advance), then forex trading gains are capital gains and can offset capital losses. By default, forex trading gains are ordinary and can not absorb capital losses.

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It's not the number of contracts, but number of round trip trades that counts. Also you need to trade on over 75% of available trading days and spend over 4 hours per day. It's harder to qualify when you have a fulltime job. See the power point on our site home page for golden rules. If you qualify, it's better to do so in a separately filed entity tax return.

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If I want to open an account with FXCM through their United States website (fxcm.com) by selecting "MetaTrader" as the trading platform, I am being automatically redirected to the FXCM website in the United Kingdom (fxcm.co.uk) to open the account. If I am U.S. resident and open the account through FXCM United Kingdom,

1- Will this account be considered a foreign account as described in Schedule B Part III?
2- Will I need to file Form TD F90.22-1?
3- Will the income generated from this account considered foreign income?
4- How will I need to report the income/loss originated from this account on my U.S. Tax Return? Can I do it on line 21 of Form 1040? Or should this be reported differently?
5- Will I need to report the forex income/loss originated from this account to both the United States and the United Kingdom tax authorities?

Thank You

See answers below.

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I have your "2009 Trader Tax Guide" and have just ordered your book.

I presently have a Micro account. I plan to set up a separate standard account and will establish Tax Trader Status with the intention of filing a Tax Entitiy Return. I have the option of setting up the account in my Living Trust (my preference) of which I am sole Trustee. My spouse and I are both retired and file a joint 1040. Is there a tax advantage of settting up the account in some way other than within my Trust?

I am studying your book. I have your "Golden Rules". My goal is to trade Forex spot (only), make money and take as many tax deductions as possible. I would like to take all steps necessary to avoid any IRS scrutiny or audit.


I do not need retirement plan or medical plan deductions.

Does electing IRC 475 MTM have any validity for my situation?

How does a trader prove to the IRS that he has "Trade Tax Status"? Is there a Form that the trader must file? Or is "Trader Tax Status" simply a documentation of required activity that must be provided to the IRS (in the event of an inquiry)?

If I qualify for "Trader Tax Status" in all areas except for $25,000 presently in my account (but achieve a $25,000 balance by year end) would I be eligible to file a 2009 Return with "Trader Tax Status"?

How would my situation benefit by filing a Tax Entity Return?

Thanks.

If I am claiming Section 1256 status for gains and losses and I transfer my account from FXCM to FXCM UK, am I still able to utilize Section 1256 or will I have to be considered under Section 988?

Thanks,

RMH