How Forex Trading Is Taxed in the US: Section 988, the 1256 Election, and Form 6781

In the United States, gains and losses from trading spot forex at a retail dealer are, by default, Section 988 foreign currency gains and losses, which are taxed as ordinary income or loss at your regular rates. You can elect, contract by contract, to treat certain currency contracts as capital instead, and if a contract is also a Section 1256 contract, the gain is then split 60% long-term and 40% short-term, but the election has to be made and recorded on the day you enter each trade.

In short: Section 988 is the default for retail forex: profits are taxed like wages, and losses are fully deductible against other income with no $3,000 cap. Exchange-traded currency futures go the other way: they are Section 1256 contracts by default, taxed 60/40 and marked to market at year end. The election that moves forex into capital treatment (often loosely called “opting out of 988”) must be identified in your records before the close of the day each trade is entered, not chosen at tax time. Section 1256 results go on Form 6781.

This guide covers federal rules for the 2026 tax year, as of November 2026, and cites the Internal Revenue Code, the Treasury regulations, IRS Publication 525 and 550, and Form 6781 by name. States add their own tax.

The misconception this article exists for

Signal channels and forex forums often say something like: “Forex is taxed at the 60/40 rate, max 26.8%.” For most retail traders, that is wrong by default. Spot forex at a retail dealer starts out under Section 988. Getting 60/40 treatment requires an election that most people never make in the form the regulations require, and whether retail spot forex can qualify at all is not settled. The rate difference is real, and so is the risk of claiming it without having done the paperwork.

Section 988: the default

Section 988 of the Internal Revenue Code covers foreign currency transactions. Section 988(c)(1)(B)(iii) lists, among others, “entering into or acquiring any forward contract, futures contract, option, or similar financial instrument” where the amount paid or received is denominated in, or determined by reference to, a nonfunctional currency (for a US individual, anything other than the US dollar).

The key rule is Section 988(a)(1)(A): foreign currency gain or loss on these transactions is “computed separately and treated as ordinary income or loss.”

What ordinary treatment means in practice:

Gains are taxed at your ordinary rates, from 10% to 37% federally, with no long-term rate regardless of holding period.
Losses are ordinary losses. They reduce other income such as wages without the $3,000 annual limit that applies to net capital losses.
No Schedule D. Section 988 results are not capital gains, so they do not go through the capital gain and loss netting on Schedule D.

The $200 rule is not for traders

Section 988(e) excludes personal transactions by individuals, and IRS Publication 525 explains the related rule: if you have a gain on a personal foreign currency transaction because of exchange rate changes, such as leftover travel money, you do not include it unless it is more than $200. That rule is for personal use of currency. Trading for profit is not a personal transaction.

Section 1256: where 60/40 comes from

Section 1256 contracts are taxed under a different regime:

60/40 split. Any capital gain or loss is treated as 60% long-term and 40% short-term, regardless of holding period.
Year-end mark-to-market. Open positions are treated as sold at fair market value on the last business day of the year.
Loss carryback. Individuals can elect to carry a net Section 1256 loss back three years against earlier Section 1256 gains.

IRS Publication 550 lists five types of Section 1256 contract, including regulated futures contracts and foreign currency contracts. It defines a foreign currency contract as one that requires delivery of (or settles by reference to the value of) a foreign currency in which positions are also traded through regulated futures contracts, is traded in the interbank market, and is entered into at arm’s length at a price determined by reference to the interbank market. It then adds that special rules for certain foreign currency transactions “may result in ordinary gain or loss treatment” and points to Section 988 and Regulations 1.988-1(a)(7) and 1.988-3.

Which forex products fall where

Product	Default treatment	Can you change it?
Spot or rolling spot forex at a retail dealer	Section 988, ordinary	A Section 988(a)(1)(B) capital election may be possible, but whether these contracts qualify as forwards and as Section 1256 foreign currency contracts is not settled. See below.
Currency futures on a US exchange (for example CME euro or yen futures)	Section 1256, 60/40, because Section 988(c)(1)(D)(i) excludes regulated futures and nonequity options that would be marked to market under Section 1256	You can elect under Section 988(c)(1)(D)(ii) to have them treated under Section 988 instead. The statute says the election must generally be made on or before the first day of the taxable year.
Listed options on currency futures	Nonequity options, which Publication 550 says include currency options; Section 1256 by default	Same Section 988(c)(1)(D) election.
Interbank currency forwards meeting the Section 1256(g)(2) test	Section 988, ordinary	A Section 988(a)(1)(B) election makes them capital, and then Section 1256 governs character.

The Section 988(a)(1)(B) election and its timing

Section 988(a)(1)(B) lets a taxpayer elect to treat foreign currency gain or loss on a forward contract, futures contract, or option as capital gain or loss, if the contract is a capital asset in the taxpayer’s hands, is not part of a straddle, and the taxpayer “identifies such transaction before the close of the day on which such transaction is entered into.”

Treasury Regulation 1.988-3(b) sets out the mechanics:

Identify on the day. The taxpayer must “clearly identify such transaction on its books and records on the date the transaction is entered into.” No specific wording is required, but the method must be applied consistently.
Verify on the return. The taxpayer must attach a statement to the return describing each election made during the year and each contract it covered. If you cannot verify the election, the IRS can invalidate the year’s elections, unless the failure was due to reasonable cause or a bona fide mistake, which you have to prove.
Or use independent verification. If you keep the electing trades in a separate account with an unrelated broker or dealer, and the broker’s statement says “Each transaction identified in this account is subject to the election set forth in section 988(a)(1)(B),” you are presumed to meet the identification and statement requirements. Straddle positions cannot be independently verified.

And the regulation adds the piece that produces 60/40: if a valid election is made for a contract that is a Section 1256 contract, “section 1256 shall govern the character of any gain or loss recognized on such contract.”

The timing myths

“Elect by January 1.” That deadline belongs to a different election: the Section 988(c)(1)(D)(ii) election to move exchange-traded currency futures and options into Section 988. The capital election for forwards and options is made per transaction, on the trade date.
“Decide when you file.” You cannot. An election identified after the fact is exactly what the same-day rule prevents: otherwise everyone would choose capital in winning years and ordinary in losing years.
“One election covers everything.” The election attaches to identified transactions. A trader who wants it for all trades needs a consistent, contemporaneous method, and the separate-account route in the regulations is the cleanest.

Does retail spot forex qualify?

This is the open question. The election is available for forward contracts, futures contracts and options. A retail spot trade that is rolled forward overnight resembles a forward in some ways, and many traders and preparers treat it as eligible. But 60/40 treatment also requires the contract to be a Section 1256 foreign currency contract, and that definition requires a contract traded in the interbank market, which a retail dealer’s own over-the-counter product arguably is not. As of November 2026, we have not found IRS guidance addressing retail rolling spot forex specifically. If you plan to rely on the election, get a qualified tax professional’s view before the first trade of the year, because the election cannot be fixed afterwards.

Worked example 1: a winning year

All figures are illustrative. A single filer has $90,000 of taxable income in 2026 before trading and nets a $15,000 gain trading EUR/USD and GBP/USD at a US retail dealer. Brackets are from IRS Revenue Procedure 2025-32: the 22% bracket runs from $50,400 to $105,700 for single filers, and the 0% long-term rate ends at $49,450 of taxable income.

Default Section 988 treatment

Taxable income becomes $90,000 + $15,000 = $105,000, still inside the 22% bracket.
Tax on the forex gain: $15,000 × 22% = $3,300, an effective rate of 22%.

If a valid election produced Section 1256 treatment

40% short-term: $15,000 × 0.40 = $6,000, taxed at 22% = $1,320
60% long-term: $15,000 × 0.60 = $9,000, taxed at 15% = $1,350
Total: $1,320 + $1,350 = $2,670, an effective rate of 17.8%

The difference is $630. At the top bracket the gap is wider: 37% under Section 988 against 0.60 × 20% + 0.40 × 37% = 26.8% under Section 1256, before the 3.8% net investment income tax where it applies.

Worked example 2: a losing year

Same trader, but she loses $15,000 instead.

Default Section 988 treatment

The ordinary loss reduces taxable income from $90,000 to $75,000, all within the 22% bracket.
Tax saved this year: $15,000 × 22% = $3,300.

If she had elected capital treatment

With no other capital gains, only $3,000 of net capital loss is deductible against ordinary income this year: $3,000 × 22% = $660 saved.
The remaining $12,000 carries forward. As a net Section 1256 loss, she could instead elect to carry it back three years, but only against Section 1256 gains in those years.

	Section 988 (default)	Section 1256 via election
$15,000 gain, tax	$3,300	$2,670
$15,000 loss, tax saved this year	$3,300	$660, plus $12,000 carried forward

This is the real trade-off. The election is a bet placed before you know the outcome. It saves tax in winning years and costs tax in losing years, and since most retail forex accounts lose money (see why most retail forex traders lose), the default ordinary-loss treatment is not the bad deal forums make it sound.

How it is reported

Section 1256 contracts (including currency futures, and forex contracts under a valid election that are Section 1256 contracts) go on Form 6781, Part I. The form splits the net 60/40 and sends the pieces to Schedule D.
Elections. The Form 6781 instructions say that if an election is made under Section 988(a)(1)(B) or 988(c)(1)(D), you attach a list of the contracts covered, showing the net gain or loss from those contracts and where it is reported on the return. If an election is made under Section 988(a)(1)(B), you report on Form 6781 the gains and losses from Section 1256 contracts that are also Section 988 transactions.
Section 988 ordinary results are reported as ordinary income or loss, not on Schedule D or Form 8949. Where exactly they go depends on your situation; follow the current Form 1040 instructions or your preparer.
Large losses. IRS Publication 550 notes that, for Form 8886 reportable transaction purposes, a Section 988 loss of at least $50,000 in a single tax year is a “loss transaction” for an individual. Check the Form 8886 rules and exceptions if you are near that level.
Broker statements. Retail forex dealers do not necessarily report spot forex the way stock brokers report shares. Keep your own trade-level records: dates, pairs, sizes, prices, swaps and commissions.

Costs, including the signal subscription

Investment expenses such as data, software and signal subscription fees were miscellaneous itemized deductions. The 2017 tax law suspended those deductions through 2025, and the One Big Beautiful Bill Act, signed July 4, 2025, made the suspension permanent by amending Section 67(g). As of November 2026, an individual investor cannot deduct a $99-a-month signal service. A trader who qualifies as being in the trade or business of trading reports those expenses on Schedule C instead, but trader status depends on substantial, frequent, continuous trading and is a facts-and-circumstances test. The separate Section 475(f) mark-to-market election for traders has its own deadline, generally the original due date of the prior year’s return. Where the money behind these subscriptions goes is covered in how signal providers make money.

What can go wrong

Claiming 60/40 without an election. If the identification was not made on the trade date, the default is Section 988 ordinary treatment.
Confusing the two elections. The January 1 deadline is for moving futures into Section 988, not for moving forex out of it.
Straddles. The capital election is not available for contracts that are part of a straddle, and a contract that later becomes part of one loses the election for gains.
Offshore accounts. Trading through a foreign broker does not change the tax rules, and it can add foreign account reporting obligations. Read offshore forex brokers explained before following a signal group’s broker link.
Copy trading and managed accounts. If a provider trades for you, the gains are still yours to report. See how copy trading works.
State tax. Most states tax capital gains as ordinary income, so the 60/40 split saves little or nothing at the state level.
Using last year’s brackets. The thresholds above are for 2026 and change every year.

The short version

Retail spot forex in the US is taxed under Section 988 by default: ordinary income, ordinary losses, no $3,000 loss cap. Exchange-traded currency futures and listed currency options are Section 1256 contracts by default, taxed 60/40 and marked to market. A trader can elect capital treatment for forwards, futures and options under Section 988(a)(1)(B), but only by identifying each trade in their records before the close of the day it is entered and verifying the election on the return; whether retail rolling spot contracts qualify for 60/40 through that route is not settled. Report Section 1256 results on Form 6781. For the other side of the border, see how forex trading is taxed in Canada.

This is general education about US federal tax rules as of November 2026, not tax or legal advice. Tax treatment depends on your circumstances and the rules change. For decisions about your own return, consult a qualified tax professional or the IRS directly.