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This Tax Alert provides an updated list of foreign currencies that traded on qualified boards or exchanges during 2022 for purposes of beginning the analysis of whether an over-the-counter contract (OTC) with respect to those currencies should be marked to market under IRC Section 1256.¹ The list contained in this Alert updates the list of foreign currency futures contracts that was provided in Tax Alert 2022-0354.

This list is retrospective; currencies can begin (or cease) trading in futures at any time. Thus, it is imperative for taxpayers to examine contemporaneous futures trading to determine whether a specific contract will qualify as an IRC Section 1256 contract.

Warning: This Alert lists all currencies for which there was a known regulated futures contract (RFC) offered for trading. A lack of actual trading (or perhaps only limited trading) in the RFC may prevent an OTC contract from qualifying as an IRC Section 1256 contract. Therefore, the list should not be viewed as definitive, but rather as a starting point in the analysis.

Under IRC Section 1256(a)(1), each IRC Section 1256 contract held by a taxpayer at the close of the tax year must be marked-to-market. The term IRC Section 1256 contract includes, among other things, any foreign currency contract,² which is defined under IRC Section 1256(g)(2)(A) as a contract that:

1. Requires delivery of, or the settlement of which depends on the value of, a foreign currency that is a currency in which positions are also traded through regulated futures contracts
2. Is traded on the interbank market
3. Is entered into at an arm's-length price determined by reference to the price in the interbank market

The legislative history indicates that the statutory definition is intended to describe the characteristics of bank forward contracts used for trading currencies.

The following is a list of currencies in which positions are currently listed through regulated single futures contracts, or cross-currency pairs, as of the date of this Alert. As noted later, although each of these contracts is listed, some show little or no trading in the past year.

1. Australian dollar
2. Brazilian real
3. British pound
4. Canadian dollar
5. Chilean peso
6. Chinese renminbi³
7. Czech koruna
8. Danish krone
9. Euro
10. Hungarian forint
11. Israeli shekel
12. Indian rupee
13. Japanese yen
14. Korean won
15. Mexican peso
16. New Zealand dollar
17. Norwegian krone
18. Polish zloty
19. Russian ruble
20. South African rand
21. Swedish krona
22. Swiss franc
23. Turkish lira

As described previously, foreign currency contracts with respect to these currencies should be marked to market under IRC Section 1256(a)(1), provided there is sufficient trading of these currencies through regulated futures contracts, and the additional conditions described in IRC Section 1256(g)(2)(A) are satisfied. Certain currencies, while listed previously as being offered for trading, had very limited trading in 2022, such as the Chilean peso. While there was minimal trading in the Norwegian krone, Swedish krona, Israeli shekel, Czech koruna and Hungarian forint single futures contracts, there was active trading in cross-currency pair contracts that involved those currencies. Therefore, it is important that taxpayers understand the RFC trading environment around the time they enter into any OTC foreign currency contract, as well as the trading environment throughout the life of the contract.

As noted, this list is subject to change on an ongoing basis as new foreign currencies begin to trade in the regulated futures market and as trading in other foreign currencies becomes thin or nonexistent. Accordingly, taxpayers ought to consult with their tax advisors when analyzing whether a foreign currency contract will qualify as an IRC Section 1256 contract.

Scope

Please note that this list does not immediately reflect changes in the status of foreign currencies but is instead generally updated only annually. Taxpayers ought to consult with their tax advisors when considering whether IRC Section 1256 applies to a particular currency.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

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ENDNOTES

¹ On July 5, 2022, the U.S. Treasury Department and the IRS issued proposed regulations under IRC Section 1256 (REG-130675-17). The proposed regulations would expressly overrule the Sixth Circuit's decision in Wright v. Commissioner, 809 F.3d 877 (6th Cir. 2016) to limit the term "foreign currency contract" to only certain foreign currency forward contracts, and not foreign currency options. The proposed regulations would be generally effective for contracts entered into on or after the date that is 30 days after their publication as final regulations in the Federal Register. See Tax Alert 2022-1060.

² IRC Section 1256(b)(1)(B).

³ While there is a single currency, renminbi, there are both offshore and onshore exchange rates and it is not clear whether these should be considered separate currencies for IRC Section 1256 purposes.