BeginnerFX
    US Traders Only

    Forex Tax Calculator

    Compare Section 988 vs Section 1256 tax treatment for your forex trading profits. Find the best option based on your income and trading results.

    Your Tax Information

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    Your taxable income before forex gains/losses

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    Enter negative number for losses (e.g., -5000)

    Disclaimer

    This calculator provides estimates only. Consult a tax professional for advice specific to your situation. Tax laws change frequently.

    Recommended Option

    Section 1256

    Save $420 in taxes

    Section 988

    Default
    Tax Treatment100% Ordinary Income
    Marginal Rate22%
    Effective Rate on Forex22.0%
    Tax Owed$2,200

    Taxed at your ordinary income tax rate

    Section 1256

    60/40 Rule
    Long-Term (60%)$6,000 @ 15%
    Short-Term (40%)$4,000 @ 22%
    Effective Rate on Forex17.8%
    Tax Owed$1,780

    60% taxed as long-term capital gains (lower rate)

    Understanding Forex Taxes in the USA

    1
    Section 988 (Default)

    • ✓Default treatment for spot forex retail traders
    • ✓Gains taxed as ordinary income (up to 37%)
    • ✓Unlimited loss deduction against other income
    • ✓Best for: Traders with losses or low income

    2
    Section 1256 (Election Required)

    • ✓Must elect OUT of Section 988 before trading
    • ✓60% long-term gains (15-20%), 40% short-term
    • ✓$3,000/year capital loss limit (carry forward)
    • ✓Best for: Profitable traders in higher brackets

    How to Elect Section 1256

    1. Create written record of your election before your first trade of the year
    2. Include: Your name, date of election, statement electing out of Section 988
    3. Attach this record to your tax documents (do not file with IRS)
    4. Keep records of all trades to support your election

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    Forex Tax FAQ

    Section 988 is the default tax treatment for retail forex traders in the US. Under this section, forex gains and losses are treated as ordinary income/loss. This means profits are taxed at your regular income tax rate (up to 37%), but you can also deduct unlimited losses against ordinary income.
    Section 1256 provides a special 60/40 tax treatment: 60% of gains are taxed as long-term capital gains (max 20%) and 40% as short-term (your ordinary rate). To use Section 1256, you must trade forex futures or options, or make an election to opt out of Section 988 for spot forex.
    To opt out of Section 988, you must make an internal election before you start trading for the year. Keep a written record with the date of election, attached to your records. Note: you cannot elect out of 988 after year-end to cherry-pick favorable treatment.
    It depends on your situation. Section 1256 is usually better for profitable traders due to the lower 60/40 rate. Section 988 may be better if you have losses (unlimited ordinary loss deduction) or if you're in a lower tax bracket. Use our calculator to compare both scenarios.
    Yes! Under Section 988, forex losses are ordinary losses with no limit on deduction against other income. Under Section 1256, losses are capital losses limited to $3,000/year against ordinary income, but can carry forward. Losses can also offset Section 1256 gains from prior 3 years.
    You must report your net forex gains or losses for the year. While you don't need to report each trade individually on your return, you should keep detailed records of all trades. Your broker may provide a 1099-B, but many forex brokers do not, so track your own P&L.

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