Over the years we have been asked many times about the rules and regulations in regards to speculating vs. hedging when it comes to income tax preparation. This research needs to be done by your tax-preparer.

A few questions you may want to ask yourself or your tax-preparer.

  1. Is the income from this transaction in the normal course of the taxpayer’s business or for investment purposes?
  2. If the transaction is in the normal course of the taxpayer’s business, does it qualify as a hedging transaction under the IRS code?
  3. Is the income treated as capital or ordinary income, and where does each get included on the tax return?
  4. What are the Mark-to-market rules, and does it apply to hedging or speculative investment transactions?

The IRS paper version of the 1099B has been updated this year to include two new boxes for securities transactions. In prior years Regulated Futures Contracts were reported in Boxes 6 through 9. This year the boxes are now 8 through 11. More importantly than the box numbers are the descriptions in each box. The same information is still included on the 1099: Realized Profit or Loss (Box 8), Value of Open Contracts the previous year (Box 9), Value of Open Contracts the Current Year (Box 10), and the Aggregate Profit or Loss (Box 11). The formula remainsthe same:

+ Realized Profit or (Loss) *

- Prior Year Value of Open Contracts (we include futures and option value in this amount)

+ Current Year Value of Open Contracts (we include futures and option value in this amount)

= Aggregate Profit or (Loss)

* The realized Profit or (Loss) includes closed out futures positions, option premiums, commissions, fees, and any P/S Adjustments like commission deducts or price changes.

 

 

Disclaimer: Frontier Futures Inc. is a discount broker. We do not offer advice.