Foreign Currency Trading

[S T]

I have a client that in 2006 was trading foreign currency. Cash deposited $5,000, at end of 12/31/06, balance was $3,438, loss $1,562. (US dollars) Not in business as a trader. An investor hoping to do well.

Question is how do I report the loss, appears it is under Sect 988, on line 21?

Sandy

[Golden Rocket]

How did this happen?

Sandy (not that I'll have an answer) -

What was the trading medium? I can think of four:
1)Possession of actual currency itself.
2)Investment in a mutual fund.
3)A levereged commodity straddle.
4)A futures contract.
The only way I can think of where he could lose 1/3 of his investment would be with #3)above. #1 would be very hard for an individual to conduct, as the moneychangers would have to be paid on every transaction.

Assuming his medium was a U S regulated company:
If #2, he will receive a 1099-DIV just like any other mutual fund. If #3, he should file Form 6781 and it will give him a number to claim on Schedule D. If #4, this would be interest income or expense (the 4952 kind). I really don't know how #1 would turn out.

Hope someone else posts, maybe someone who deals in securities. But reporting this loss may depend on how his money was invested.

[Gene V]

Sandy,
The way I understand it:

If he doesn’t elect out of IRC 988, he would report his ordinary gain or loss from forex as
Other income on line 21.

If he elect out of IRC 988, then he uses Form 6781.

See this web site for information on currency trading

http://www.ibfxu.com/Courses/TAX/tax1020.aspx

[S T]

Thanks Gene and Golden Rocket

My take is small time investor, that thought he could make a "bundle" and instead lost some. So investor not a trader.

Dealing through FX direct, so I have print outs of the activities and month end reports and no 1099 B forms.

All cash deposited, and then trades daily or every other day in small increments, so I have plus and minus on sells and the account balance goes up or down.(All US Dollars)

So if I net the deposit and the buy/sell transactions, I am at a negative as of 12/31/06 so would seem to be a loss. Seems like a "straddle or commodity, future" but different. As the client is working with his initial deposit of $5,000 and FX direct is keeping tract of that money, no margin.

Thanks Gene, for the link.


Gene, I think you are correct from what I researched, I just show a loss under Sect 988 on line 21, only $1562 so not a huge amount. For losses based on what I read not advantageous to elect out of Sect 988 as it is an ordinary loss. Only elect out when there is a gain!

I hope this client has decided this is not for him, otherwise I am charging him double to figure this out for 2007.

Sandy