What you need to know about taxes if you are day trading currencies

If you trade currencies daily, the tax laws that apply to you can be confusing, and there are gray areas. How taxes are applied to you can be affected by:
Whether you are an individual or a business: Small single currency transactions are usually considered as type exchanges; For example, if you go on vacation to Mexico, exchange your dollars for pesos when the dollar is strong and then change the rest at the border a week later when the dollar is a little weaker, you will have made a profit.
However, the leave transaction is not to be reported, because, in essence, you traded two identical items: money for money. However, a business can accumulate taxable gains and losses due to changes in exchange rates.
If the company makes goods in the United States and sells them through its Mexican subsidiary, for example, then the amount of profit or loss the subsidiary owns depends on the exchange rate between the dollar and the peso, and this determines how much tax the company pays. In this case, identical objects are not exchanged.
The IRS has a lot of rules about how companies handle foreign exchange under Section 988 of the Tax Code.
Whether you’re trading physical currency or currency futures and options: Futures and currency options are taxed under Section 1256 using the easy-to-use 60/40 rule described in the previous section. But you are trading the spot market. You are not trading currency contracts, you are trading actual currency. What do you do about the profits and losses that may accrue to you?
The IRS isn’t keen on asking you for a similar tax-deductible swap if your goal is to make a living currency trading. But you’re not running a business with outside operations, are you? Unfortunately, there are no clear guidelines here, so you will probably want to work with an accountant.
The general idea is that you can report your currency trading through Section 988 or Section 1256. Under Section 988, your trading gains and losses are short-term capital gains in your trading business. This will save you money if you lose money trading but it will cost you if you make money.
Under Section 1256, your spot trading is treated as a futures contract, and you pay short-term capital gains taxes on 40 percent of your earnings and long-term capital gains taxes on the remaining 60 percent of your earnings. This should save you money in the years you made money.

the key? be consistent. You cannot file under Section 988 when you are losing money and under Section 1256 in the years you are making a profit. This game makes the IRS very unhappy, and you don’t want the tax officials to be unhappy with you.
Although you should consider this as guidance rather than professional tax advice, this caveat is especially true for information related to currencies. The CFTC and the Internal Revenue Service both take a close look at the forex market to clarify regulations, so the information may be very different when you pay your taxes.