July 27, 2022 - Douglas Myser

IRS and Treasury on section 1256 contracts. The IRS and Treasury put out information to further clarify Section 1256 mark to market rules, defining foreign currency contracts. It had a lengthy preamble, which noted that other types of contracts may be rules by Section 1256, which covers, not just foreign currency contracts, but a variety of other types of instruments some of which involve foreign currencies. They may include nonequity options, under Section 1258(b)(1)(c), defined at Section 1256(g)(5) as "any option which is traded on a qualified board or exchange". Such a nonequity option may include foreign currency options, according to the preamble. IRS and Treasury on section 1256 contracts.

Mark to market treatment under Section 1256 means that these specified contracts are treated for tax purposes as if they were sold for their fair market value on the last business day of each tax year and any gain or loss is taken into account for that tax year (generally as 60% long term capital gain or loss and 40% short term capital gain or loss). Generally, Section 1256 contracts include besides foreign currency contracts and nonequity options, regulated futures contracts, dealer equity options, and dealer securities futures contracts. The preamble also notes that, in holding that a foreign currency option could be a foreign currency contract under Section 1256(g)(2), the Sixth Circuit in Wright, 809 F 3d 877(6th Cir. 2016) found that that plain language included foreign currency contracts that do not mandate settlement. The appellate court noted that Treasury and the IRS, "had express authority to change this result for future taxpayer's", under the preamble.

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