As discussed thus far in our Trader Tax Topics, active traders have some unique challenges when it comes to preparing their trader taxes. Basically active traders have only a few IRS forms to deal with depending upon which instruments they traded. A summary of the different trading instruments available, and what IRS form is required for filing your gains and losses for them is listed below:
- Stock, Option, and Single-Stock-Futures Trading
IRS form to file: IRS SCHEDULE D - 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 page for details.
- Stock, Option, and Single-Stock-Futures Trading
IRS form 4797- Sales of Business Property
Form 4797 is used by those traders who have elected the "Mark to Market" (MTM) accounting method for calculating short term capital gains. Please see our Mark to Market page for details.
- Futures Trading
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 (such as options on OEX, SPX, NDX, etc.). The form is broken down into two sections:
- Part I - Section 1256 Contracts Marked to Market
- Part II - Gains and Losses from Straddles
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 match and list your trades to file your taxes. You simply take the section 1256 gross proceeds amount 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 Trading
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 item 3 above.
- Forex Trading
Forex 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.
Please note: This information is provided only as a general guide and is by no means to be taken as official IRS instructions. As always, please consult your tax advisor or accountant for details.
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