Do Foreign Currency Contracts Qualify as Section 1256 Contracts?
Yes, foreign currency contracts (specifically "foreign currency contracts" as defined in Section 988(c)(1)(B)) that are traded in the interbank market are treated as Section 1256 contracts if they require delivery of a foreign currency or a specified amount of US dollars. This subjects them to the 60/40 tax rule.
However, certain other foreign currency transactions may be treated differently under Section 988.
Glossar
Long-Term Capital Gains
Benefit ⎊ Long-term capital gains represent the profit realized from the sale of a capital asset, including certain cryptocurrencies and financial derivatives, held for a period exceeding one year.
Foreign Currency
Denomination ⎊ Foreign Currency, in the context of crypto derivatives, refers to any sovereign fiat currency other than the base or quote currency of the primary cryptocurrency being traded, such as EUR or JPY when trading BTC/USD derivatives.
Section 1256
Standardization ⎊ This specific tax code provision mandates special treatment for certain regulated futures contracts, which can apply to crypto derivatives traded on designated exchanges under specific conditions.