To report forex losses on your tax return, you use one of two paths: spot and over-the-counter currency trades go on Schedule 1 of Form 1040 as an ordinary loss under Section 988, while exchange-traded currency futures and qualifying interbank contracts go on Form 6781 and flow to Schedule D as a 60/40 capital loss under Section 1256. Which path applies is fixed by what you traded, not by what you’d prefer at filing time, and the difference determines whether your full loss offsets your wages this year or trickles out $3,000 at a time.
Figure Out Which Code Section Applies
Most retail forex traders buy and sell currency pairs through online platforms in spot or over-the-counter transactions. These fall under Section 988 by default, which treats all gains and losses as ordinary income or ordinary loss.1Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions Your loss is deducted at the same rate as your salary or freelance income.
Exchange-traded currency futures and certain foreign currency contracts traded in the interbank market fall under Section 1256. These contracts are marked to market at year-end and receive a 60/40 split: 60% of any gain or loss is treated as long-term capital, and 40% as short-term, regardless of holding period.2Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market If you traded currency futures on a regulated exchange such as the CME, this is your section.
Once you know which category your trades fall into, the forms, the loss limits, and the carryback options all follow.
Reporting Section 988 Losses on Schedule 1
For spot and OTC forex, report your total net loss on Line 4 of Schedule 1 (Form 1040), labeled “Other gains or (losses).”3IRS.gov. 2025 Schedule 1 (Form 1040) – Additional Income and Adjustments to Income Enter the aggregate figure. You are not required to list individual trades on Schedule 1, but keep your detailed trade log available in case the IRS asks how you arrived at the number.
The loss flows from Schedule 1 into your Form 1040 and reduces your adjusted gross income dollar-for-dollar. A $15,000 spot forex loss against $80,000 in wages produces $65,000 of adjusted gross income. No annual dollar cap applies.1Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions
If your losses are large enough to push total income below zero, the excess can generate a net operating loss that carries forward indefinitely, with the deduction in any carryforward year capped at 80% of that year’s taxable income.4Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
Reporting Section 1256 Losses on Form 6781 and Schedule D
Currency futures and qualifying interbank contracts go on Form 6781. The form calculates your net gain or loss and does the 60/40 split for you: Line 8 computes 40% as short-term capital gain or loss, and Line 9 computes 60% as long-term.5Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles Those two amounts transfer to Schedule D (Form 1040) as summary totals. Section 1256 contracts bypass Form 8949 entirely — individual trades do not need to be listed there.6Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
Use the current tax year’s version of each form. Line numbers shift between years, and outdated forms can cause processing delays.
The $3,000 Capital Loss Cap
Any net capital loss left after offsetting your capital gains can be deducted against ordinary income only up to $3,000 per year, or $1,500 if married filing separately.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses A $30,000 loss on forex futures would take a decade to fully deduct against wages alone. Unused capital losses carry forward indefinitely, applied first against future capital gains and then up to $3,000 against ordinary income each year.
The Three-Year Carryback for Section 1256 Losses
Section 1256 offers a benefit Section 988 does not: you can elect to carry a net Section 1256 contracts loss back three years and apply it against Section 1256 gains from those prior years.8Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers The election is available to individuals only, not corporations, estates, or trusts.
To make the election, check Box D on Form 6781 and enter the carryback amount on Line 6. Then file either Form 1045 (Application for Tentative Refund) or an amended return for each carryback year, attaching an amended Form 6781 and amended Schedule D.5Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles The carryback for each prior year is limited to the net Section 1256 gain that year, cannot create or increase a net operating loss in the carryback year, and is applied to the earliest year first.
Electing Out of Section 988 (And Why Losing Traders Usually Shouldn’t)
The statute allows some Section 988 traders to elect capital treatment instead of ordinary treatment, but only for specific instruments: forward contracts, futures contracts, and certain options that qualify as capital assets and are not part of a straddle.1Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions Spot forex transactions — what most retail traders execute — are not eligible.
The election is also contemporaneous and per-trade. You must identify each transaction as subject to the election before the close of the day you enter into it, and Treasury regulations require that the identification be verifiable through independent records. A note added at year-end will not satisfy the requirement.
If your year was a losing one, think twice before electing out even where you are eligible. Ordinary losses under Section 988 offset all income with no dollar cap. Capital losses face the $3,000 annual limit. The election mainly benefits traders who expect consistent gains and want the lower long-term rate on 60% of them.
Records and Converting Foreign Currency
Accurate reporting starts with your brokerage statements and trade log for the full calendar year, showing the date, currency pair, and profit or loss for each trade. If your broker reports in U.S. dollars, your job is mostly aggregation. If your broker reports in a foreign currency, every transaction has to be converted.
The IRS has no official exchange rate. It generally accepts any posted rate you use consistently.9Internal Revenue Service. Yearly Average Currency Exchange Rates You can use a bank spot rate, a Federal Reserve rate, or the IRS yearly average rates. The consistency requirement is real — cherry-picking the most favorable rate trade by trade is not acceptable.10Internal Revenue Service. Foreign Currency and Currency Exchange Rates
Subtract total cost basis from total proceeds to arrive at your net gain or loss for the year, then enter that figure on the appropriate form. Keep every trade confirmation, statement, and conversion calculation. The burden of proving a deduction rests on you.
The Wash Sale Rule Does Not Apply
The wash sale rule under Section 1091 disallows a loss if you buy a substantially identical position within 30 days before or after the sale, but it applies specifically to “shares of stock or securities.” Foreign currencies are neither.11Office of the Law Revision Counsel. 26 US Code 1091 – Loss From Wash Sales of Stock or Securities Section 1256 makes the exemption more explicit for marked-to-market contracts.2Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market You can close a losing EUR/USD position and reopen an identical one the next day without deferring the loss.
Deadlines, Penalties, and How Long to Keep Records
The deadline for filing a 2025 individual return is April 15, 2026.12Internal Revenue Service. IRS Opens 2026 Filing Season Missing the deadline triggers a failure-to-file penalty of 5% of the unpaid tax for each month or partial month the return is late, up to 25%.13Internal Revenue Service. Failure to File Penalty An accuracy-related penalty of 20% of the underpayment can also apply if the IRS finds negligence or a substantial understatement, which for forex traders most often comes up when losses are overstated or gains are omitted.14Internal Revenue Service. Accuracy-Related Penalty
Keep records related to your forex trades and filings for at least three years from the date you filed the return. If you underreported gross income by more than 25%, the IRS has six years to assess additional tax.15Internal Revenue Service. How Long Should I Keep Records There is no time limit if you filed a fraudulent return or never filed.16Internal Revenue Service. Time IRS Can Assess Tax A practical retention window is six years for confirmations and tax documents.