The most common trading instruments are listed in the table below:
Traders and investors have only a few IRS tax forms to deal with depending upon which instruments they traded. A summary of the different trading instruments available along with the IRS tax form required for filing your gains and losses is listed below:
IRS form to file: IRS SCHEDULE D (Form 1040) - Capital Gains and Losses
Most cash basis traders fall into this category and file their gains and losses on schedule d. At first glance this form may seem quite simple to fill out, but nothing is as simple as it seems for the active trader.
Please see our irs schedule d tax topic for details.
Mark to MarketFor those who have elected the mark to market accounting method with the IRS: IRS form to file: IRS FORM 4797 - Sales of Business Property Please see How to report gains and losses marked to market for details. |
IRS form to file: IRS FORM 6781 - Gains and Losses from Section 1256 Contracts and Straddles
Form 6781 is used for all commodity futures, index futures, and broad-based index options contracts.
The form is broken down into two sections:
The advantage of these trading instruments is that they are taxed at a 60% long-term and 40% short-term.
There are no IRS requirements to itemize your futures trades to file your taxes.
Simply take the section 1256 net gain and loss figures from your broker provided 1099 and enter the total on:
Part I - line 2 - Net gain (or loss) of Form 6781.
This is the minimum amount of paperwork
required by any of these instruments and makes filing your taxes on Futures
trading much simpler than trading stocks and options. No other reports
or attachments are required.
Currency futures contracts are considered by the IRS as section 1256 contracts, and are treated the same as any other Future or Commodity contract - see Futures Trading above.
FOREX (Foreign Exchange Market) trades are not reported to the IRS the same as stocks and options, or futures. FOREX trades are considered by the IRS as simple interest and the gain or loss is reported as “other income” on Form 1040 (line 21). No special schedules or matched trade lists are necessary.
For a detailed discussion on filing your taxes for your FOREX trades see the GreenTraderTax Currency Education topic.