Are Forex Trading Profits Taxed Under Section 988 or 1256 in the US?

Two traders make the same $10,000 trading the euro. One trades spot EUR/USD with a retail broker, the other trades euro futures on the CME. They can end up with different tax bills, and the difference comes down to two sections of the US tax code.

What people on X are asking

In August 2025 one trader shared what he had learned about taxes on forex: spot under Section 988, futures under Section 1256, noting ordinary treatment for spot and 60/40 for futures, with a three-year loss carryback for 1256 contracts. In November 2023 another user argued that trading your own cash in forex and futures puts profits under Section 1256 with 60/40 rates, compared with prop firm payouts reported on a 1099. And in February 2026 a crypto tax account explained what Section 1256 contracts are, listing futures, many index options and exchange-traded currency contracts. The second post needs a correction: spot forex is not automatically 1256.

The fact-checked answer

The default: Section 988. Section 988(a)(1)(A) of the Internal Revenue Code says foreign currency gain or loss from a "section 988 transaction" is computed separately and treated as ordinary income or loss. Section 988 transactions include buying or selling foreign currency and entering into forward contracts, futures and options denominated in a foreign currency. A retail spot forex account is generally in this bucket. Ordinary treatment cuts both ways: gains are taxed at your income-tax rate, but losses are ordinary too and can offset wages, not just capital gains.

The alternative: Section 1256. Section 1256 contracts include regulated futures contracts and "foreign currency contracts", meaning contracts that require delivery of a currency traded through regulated futures and are traded in the interbank market at arm's length prices. They are marked to market: open positions are treated as sold at fair value on the last business day of the year. Gains and losses are then 60% long-term and 40% short-term capital, regardless of how long you held them. CME currency futures are the clearest example.

The election out of 988. Section 988(a)(1)(B) lets a taxpayer elect capital treatment for forwards, futures and options that are capital assets and not part of a straddle. The Treasury regulation (26 CFR 1.988-3) says you make the election by clearly identifying the transaction on your books and records on the date it is entered into. No special form is needed, but the method must be consistent. You cannot wait to see whether the year was profitable.

Same $10,000 gain, illustrative tax under each treatment

Federal income tax only, illustrative rates; excludes state tax and the 3.8% net investment income tax. Your own rates depend on total income. Tap a column header to sort.

Treatment	How the gain is split	Example rate if ordinary rate is 24% and long-term rate is 15%	Tax on $10,000
Section 988, ordinary	100% ordinary	24%	$2,400
Section 1256, 60/40	60% long-term, 40% short-term	0.6 × 15% + 0.4 × 24% = 18.6%	$1,860
Top bracket, 988	100% ordinary	37%	$3,700
Top bracket, 1256	60/40	0.6 × 20% + 0.4 × 37% = 26.8%	$2,680

UXS decision diagram

Which section probably applies to your currency trades?

Text version of the diagram

1. Are you trading regulated currency futures (for example CME FX futures)? If no: Go to the next question
2. Is it a spot or OTC forex trade with a retail dealer? If no: Ask a tax adviser about forwards and options
3. Did you identify the trade as a capital election on your books on the trade date? If no: Section 988 ordinary treatment, the default
4. Otherwise: Possible capital treatment under 988(a)(1)(B); professional advice recommended

Diagram drawn by UXS. A simplified decision aid for education, not a recommendation.

For futures, the answer at the first question is simply Section 1256, 60/40.

When 988 is better. In a losing year, ordinary losses are more valuable than capital losses because individuals can deduct only $3,000 a year of net capital losses against ordinary income. That is one reason many retail traders do not elect out. Section 1256 losses have their own relief: individuals can elect to carry a net 1256 loss back three years against 1256 gains.

Prop firm payouts are different. A funded-account payout is generally paid as service or contractor income, not as a trading gain on your own capital, so neither 988 nor 1256 applies. See whether prop firm payouts are taxable. The same goes for crypto, which has its own rules described in how crypto gains are taxed.

Decision helper

Related reading: why US brokers cap leverage at 50:1, why US traders cannot hedge the same pair and how long to hold for long-term gains.

Common mistakes

• Assuming spot forex gets 60/40 treatment automatically.
• Trying to make the capital election at tax time.
• Ignoring that 1256 positions are taxed on open profits at year-end.
• Treating prop firm payouts as capital gains.

FAQ

Is forex taxed as capital gains in the US?

Spot forex is ordinary income under Section 988 by default; currency futures are 60/40 capital under Section 1256.

What is the Section 988 election?

An election to treat qualifying forwards, futures or options as capital, identified on your records on the trade date.

Does 60/40 apply to spot forex?

Not by default. It applies to Section 1256 contracts such as regulated futures.

Is a Section 988 loss deductible?

Yes, as an ordinary loss, which can offset other income.

What does marked to market mean?

Open 1256 positions are treated as sold at year-end prices, so unrealised gains are taxed.

Should I hire a tax professional for forex?

If you trade actively, use elections or trade both spot and futures, it is usually worth it.