GTT RESOURCES: FOREIGN
See our Updated Trader
Tax Center pages.
OLDER CONTENT: We cover this in Green's
2012 Trader Tax Guide
Now a foreign exchange needs both a CFTC and IRS permission letter for
Section 1256 treatment.
Futures traded on Foreign Futures Exchanges:
A foreign futures exchange only receives Section 1256
(lower 60/40) tax treatment on selected instruments if the IRS
expressly approves Section 1256 treatment in an official
IRS pronouncement. See examples in Revenue Ruling 2009-4 and
A no-action letter from the CFTC - allowing a foreign
futures exchange to offer futures contracts in the U.S. under Rule 30.10A
- may be a starting point for achieving this tax-advantaged
treatment, but it's not enough on it's own. Recent IRS
rulings and guidance have indicated that the IRS pronouncement itself
is the deciding factor.
Ruling 2009-04 holds that Dubai Mercantile Exchange, a United Arab
Emirates Authorized Market Institution, is a qualified board or exchange
within the meaning of section 1256(g)(7)(C) of the Internal Revenue Code.
This ruling is effective for Dubai Mercantile Exchange Contracts (commodity
futures contracts and futures contract options) entered into on
or after Feb. 1, 2009. Revenue Ruling 2009-04 will be IRB 2009-5,
dated February 2, 2009.
Revenue Ruling 2007-26 "holds that ICE Futures, which is a United
Kingdom Recognised Investment Exchange, is a qualified board or exchange
within the meaning of section 1256(g)(7)(C) of the Code."
Our older content below laid out a “reasonable basis” argument
that a foreign futures exchange will constitute a qualified board or exchange
if it receives a no-action letter from the CFTC allowing it to offer futures
contracts in the U.S. under Rule 30.10. A “reasonable basis”
means that we do not necessarily believe that a court would rule in favor
of this position.
Reference William R. Pomierski, “Code Sec. 1256 Considerations for
ICE Futures and Beyond,” JOURNAL OF TAXATION OF FINANCIAL PRODUCTS
Volume 6 Issue 4 2007 writes:
CFTC Rule 30.10 permits a foreign regulatory or self-regulatory organization
to petition the CFTC for an order allowing member firms to conduct business
from locations outside of the United States for United States persons
without registering under the CEA. In light of the fact that ICE Futures
had previously received a no-action letter from the CFTC allowing it
to offer futures contracts (and options thereon) in the U.S. under Rule
30.10, the IRS seems to have made it clear in Rev. Rul. 2007-26 that
Rule 30.10 status does not result in an exchange being considered a
qualified board or exchange for Code Sec. 1256 purposes under Category
1 or Category 2. As such, financial positions that trade on a foreign
exchange operating in the U.S. under Rule 30.10 should not be considered
Section 1256 Contracts absent a ruling or other determination letter
from the IRS specifically designating any such exchange as a Category
The fact that this is the IRS position does not mean that it is binding
on a taxpayer. Nevertheless, to the extent that prior ambiguity on the
IRS position allowed a taxpayer to argue that he had a reasonable basis
position, we feel that ambiguity no longer exists.
We also note that the highly regarded Keyes treatise (2007 version) states:
In contrast to domestic futures exchanges, a foreign futures exchange
by definition cannot qualify as a domestic board of trade designated
as a contract market by the CFTC. Accordingly, a foreign futures exchange
will constitute a qualified board or exchange only if the Treasury determines
that the exchange has rules adequate to carry out the purposes of Section
Also, COMREP ¶ 12,561.02 ('81 Economic Recovery Tax Act, , PL
97-34, 8/13/81), the legislative history to Section 1256, states:
. . . traded on or subject to the rules of a domestic board of trade
designated as a contract market by the Commodity Futures Trading Commission,
or of any board of trade or exchange which the Secretary determines
operates under rules adequate to carry out the purposes of the mark-
This is in line with the actual rule of 1256(g)(7):
(7) Qualified board or exchange.
The term “qualified board or exchange” means—
(A) a national securities exchange which is registered with the Securities
and Exchange Commission,
(B) a domestic board of trade designated as a contract market by the
Commodity Futures Trading Commission, or
(C) any other exchange, board of trade, or other market which the Secretary
determines has rules adequate to carry out the purposes of this section.
We find it very difficult to continue to argue that a foreign exchange
qualifies under Section 1256(g)(7)(A) or (B) unless the foreign exchange
is treated as an extension of a domestic exchange, which is what happened
in Rev. Rul. 87-43-- the CME and the SIMEX entered into an agreement to
establish the Mutual Offset System,which provides an inter-exchange clearing
process by which customers can establish new positions or offset existing
positions on one exchange, during hours in which that exchange is closed
for trading, by the execution of a contract on the other exchange. As
we understand it, that is not the case for an exchange which receives
a no-action letter from the CFTC allowing it to offer futures contracts
in the U.S. under Rule 30.10.
Old 2003 Content:
Exchange Traded Futures - Old Content
The following question was asked on our GTT
Message Board: "Are futures trades done on foreign exchanges
also taxed at 60/40 for U.S. citizens, or does 60/40 only apply to futures
listed on US exchanges."
Here was our old answer.
There is a reasonable basis in fact and law to conclude that futures traded
on certain foreign contract markets with either a CFTC Rule 30.10 exemption
or No Action Letter (defined below) are entitled to classification as
Section 1256 contracts (e.g., commodities) with the result that “60/40”
tax treatment is appropriate.
The 60/40 Question
Section 1256 requires certain types of contracts to be marked to market
at year-end, regardless of the taxpayer's status. Gain or loss, under
Section 1256(a)(3), is 60% long-term capital gain and 40% short-term capital
gain. Long-term capital gains are taxed at a maximum rate of 15% for all
sales after May 5, 2003. Short term capital gains are taxed at the normal
tax rate. The maximum short term ordinary rate is 35%, effective January
Commodities receive preferential tax treatment over securities (e.g.,
stocks, stock options, narrow based indices, single stock futures, mutual
funds, Exchange Traded Funds (e.g., QQQs) and bonds).
Section 1256 Contracts
Section 1256 was introduced into law by the Economic Recovery Tax Act
of 1981, Pub. L. 97-34, 95 Stat. 172 (effective date June 23, 1981). Section
1256 contains special rules for reporting gains and losses from "section
Section 1256(b) defines the term "section 1256 contract" (e.g.,
commodities) as including any regulated futures contract, any foreign
currency contract, any non-equity option, any deal equity option and any
dealer securities futures contract. The Commodities Futures Modernization
Act of 2000 (CFMA) established that broad based indices are also considered
Section 1256(g)(1) provides that the term "regulated futures contract"
means a contract (A) with respect to which the amount required to be deposited
and the amount which may be withdrawn depends on a system of marking to
market, and (B) which is traded on or subject to the rules of a qualified
board or exchange.
A futures contract is not defined in Section 1256. The CFTC defines a
futures contract as "an agreement to purchase or sell a commodity
for delivery in the future: (1) at a price that is determined at initiation
of the contract; (2) which obligates each party to the contract to fulfill
the contract at the specified price; (3) which is used to assume or shift
price risk; and (4) which may be satisfied by delivery or offset."
Only a futures contract that has actually been traded on a CFTC designated
contract market or subject to its rules is a regulated futures contract
for purposes of § 1256(g)(1).
A regulated futures contract can be traded by either a taxpayer as a
principal or by a third party acting on the taxpayer's behalf as an agent.
Futures contracts that have been traded by two private parties "over
the counter" ("OTC") are not traded on a contract market
and are not regulated futures contracts for purposes of Section 1256(g)(1).
See Revenue Ruling. 87-43, 1987-1 C.B. 252.
A futures contract that does not meet these terms may be a non-regulated
futures contract. The difference between forward contracts and futures
contracts is that the parties to a forward contact generally intend to
make and take delivery. Parties to a futures contract are speculators
who intend to close out their positions by offset before delivery.
Section 1256(g)(7) provides that the term "qualified board or exchange"
means (A) a national securities exchange which is registered with the
Securities and Exchange Commission; (B) a domestic board of trade designated
as a contract market by the Commodity Futures Trading Commission, or (C)
any other exchange, board of trade, or other market which the Secretary
determines has rules adequate to carry out the purposes of this section.
While the Secretary of the Treasury has not taken up its congressional
mandate to create legislative certainty in this area, it can be argued
that the CFTC, by default, has filled the interstitial legislative gap.
Why 60/40 Treatment is Viable
Since the enactment of Section 1256 in 1981, a number of contract markets
throughout the world have implemented adequate rules and could be determined
to be a "qualified board or exchange" within the meaning of
Section 1256(g)(7). The Treasury Department's recognition of the appropriate
extension of 60/40 tax treatment to foreign exchanges, boards of trade,
and other markets pursuant to Section 1256(g)(7)(C) is long overdue and
is not likely to be forthcoming anytime soon.
While a formal designation as such by the Treasury would expressly make
futures contracts traded on these foreign exchanges eligible for treatment
as a Section 1256 contract (e.g., eligible for 60/40 capital gain or loss
treatment, the lack of such designation by the Secretary does not necessarily
preclude 60/40 tax treatment.
For purposes of determining the tax consequences of a transaction, it
is necessary to ascertain the legal relationships that exist between the
parties to the transaction. In the typical exchange clearing process for
a futures or option contract, an exchange clearing house is interposed
between the original parties to the transaction, namely, the clearing
members who represent the purchaser and seller under the contract.
Although there are a series of steps involved in the typical exchange
clearing process, the step transaction doctrine provides that these steps
are not analyzed separately but are viewed as component parts of a single
In the typical exchange clearing process, the legal relationship between
the investor and the broker remains unchanged notwithstanding the fact
that an exchange clearing house is interposed between the original parties
to the transaction.
Relying on this type of analysis, in Revenue Ruling 85-72,
1985- 1 CB 286, the IRS determined that International Futures Exchange
(Bermuda) Ltd. was a qualified board or exchange.
The Tax Court, in Johnson v. CIR, T.C. Memo (1993-178), stating that
the purpose of Section 1256 is to provide the system of taxation based
on marking to market of regulated futures contracts, held the taxpayer’s
trading in futures contracts and in futures transactions on the London
Metal Exchange were conducted subject to the rules of a board of trade
or commodity exchange within the meaning of Section 1256(g)(7).
However, in Revenue Ruling 87-43, 1987-1 CB 252, the IRS ruled that Singapore
International Monetary Exchange Limited (SIMEX) was a foreign board of
trade that was not a qualified board or exchange. In that ruling, the
Chicago Mercantile Exchange (CME) and the SIMEX established the Mutual
Offset System (System) to provide a process by which customers could establish
new positions or offset existing positions on one exchange, during hours
in which that exchange is closed for trading, by the execution of a contract
on the other exchange.
Commodity Futures Trading Commission
The same type of legal analysis can be extended to decisions of the CFTC
with respect to foreign contract markets.
Part 30 of the CFTC's regulations establishes the regulatory structure
governing the offer and sale of foreign futures and options contracts
to US persons by persons acting as futures commission merchants, introducing
brokers, commodity pool operators, and commodity trading advisors.
Section 30.10 of these regulations allows the CFTC to, among other things,
exempt a foreign firm acting in the capacity of a futures commission merchant
from compliance with certain CFTC rules and regulations. To receive such
relief under Rule 30.10, the firm's home-country regulator must demonstrate
that it provides a comparable system of regulation and must enter into
an information-sharing agreement with the CFTC.
Once a firm receives confirmation of Rule 30.10 relief, it may engage
in the offer or sale of foreign futures and options contracts to U.S.
persons without registering with the CFTC on the terms specified in the
Rule 30.10 Order.
The following regulatory and self-regulatory authorities have received
CFTC Rule 30.10 Orders.
Sydney Futures Exchange (SFE)
ASX Futures Proprietary Limited (ASXF)
Bolsa de Mercadorias & Futuros
Winnipeg Commodity Exchange
Toronto Futures Exchange (TFE)
Marché à Terme International de France (MATIF)
Tokyo Grain Exchange (TGE)
New Zealand Futures and Options Exchange (NZFOE)
Singapore International Monetary Exchange (SIMEX)
MEFF Sociedad Rectora de Productos Financieros Derivados de Renta Fija
(MEFF Renta Fija)
MEFF Sociedad Rectora de Productos Financieros Derivados de Renta Variable
(MEFF Renta Variable)
Securities and Investments Board (SIB) (now Financial Services authority
Association of Futures Brokers Dealers (AFBD)
The Securities Association (TSA)
Investment Management Regulatory Association (IMRO)
Securities and Futures Authority (SFA) (previously AFBD and TSA)
There is a reasonable basis in fact and law to conclude that futures
traded on foreign contract markets with a Rule 30.10 exemption are entitled
to classification as Section 1256 contracts (e.g., commodities) with the
result that “60/40” tax treatment (defined below) is appropriate.
All that is needed is a determination by the Treasury Secretary.
In the absence of a forward determination by the Secretary, it may be
possible to develop an appropriate and reasonable tax return position
in support of 60/40 tax treatment for futures contracts traded on the
foregoing foreign contract markets.
The CFTC has effectively determined that the foregoing contract markets
are exchanges, boards of trade and other markets qualified within the
meaning of Section 1256(g)(7) as such boards and exchanges have rules
adequate to support the purpose of Section 1256.
In addition, it can be posited due to the extensive review conducted
by the CFTC’s Division of Market Oversight, futures traded through
the foreign entities (listed below) receiving No Action Letters from the
CFTC eligible for Section 1256 60/40 tax treatment, pursuant to the analysis
MEFF AIAF SENAF Holding de Mercados Financieros S.A. (MEFF) Madrid and
Bourse de Montreal, Inc. Montreal, Quebec, Canada
London Metal Exchange Limited. (LME) London, U.K.
Eurex Zurich. (Eurex CH) Zurich, Switzerland
OM London Exchange Limited. (OM) London, U.K.
Hong Kong Futures Exchange Ltd. (HKFE) Hong Kong, China
International Petroleum Exchange of London Limited. (IPE) London, U.K.
Eurex Deutschland. (Eurex) Frankfurt, Germany
SFE Corporation Ltd. Sydney, Australia and Auckland, New Zealand
Euronext Paris. Paris, France
London International Financial Futures and Options Exchange (LIFFE). London,
Here is a follow up comment from GreenTraderTax
Note that although I am sympathetic to the argument that any foreign
board or exchange that has received notification from the CFTC under Rule
30.10 is a qualified board or exchange under Section 1256(g), the IRS
has not ruled on this.
The 1993 Johnson TC Memo case cited on our website holds that the London
exchange was a board or exchange, under prior law dealing with the definition
of a capital asset and holding periods, former Section 1222.
The court did not hold that the London exchange was a qualified board
or exchange under Section 1256(g), as the case's facts arose before the
enactment of Section 1256. Therefore, while Johnson is favorable, there
is still a gap, as our website makes clear.
Should an aggressive taxpayer conclude that the gap should be filled in
by default? Our websiste certainly gives fair disclosure, and leaves it
up to the taxpayer. Certainly, I think that there is a reasonable basis
for a return position. The IRS itself has acted recently to extend these
interstitial gaps, in the area of "foreign currency contracts"
by arguing that the term includes not just interbank traded forwards,
but other OTC forex contracts as well.