On September 26, 2024, the IRS released Revenue Ruling 2024-22, holding that MX is a qualified board or exchange within the meaning of IRC Section 1256(g)(7)(C).

Background

IRC Section 1256 stipulates that contracts classified as "section 1256 contracts" are marked to market at the end of each tax year as if those transactions were sold for fair market value. Subject to important exceptions, any gain or loss from the mark is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss, regardless of how long the taxpayer actually held the contract. Under IRC Section 1256(b)(1), the term "section 1256 contract" includes a regulated futures contract, foreign currency contract, nonequity option, dealer equity option and dealer securities futures contract. With the exception of a foreign currency contract, a "section 1256 contract" must be traded on or subject to the rules of a "qualified board or exchange," as defined in IRC Section 1256(g)(7).

IRC Section 1256(g)(7) defines the term "qualified board or exchange" as: (A) a national securities exchange that 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 that the Secretary of the Treasury or delegate determines has rules adequate to carry out the purposes of IRC Section 1256.

Revenue Ruling 86-7 previously determined that the Mercantile Division of the Montréal Exchange was a qualified board or exchange. The Mercantile Division of the Montréal Exchange was an exchange associated with MX that has ceased operations and since been inactive. There was uncertainty as to whether Revenue Ruling 86-7 applied to MX following the cessation of operations by the Mercantile Division. In Revenue Ruling 2024-22, the IRS has determined that MX is a qualified board or exchange within the meaning of IRC Section 1256(g)(7)(C) and stated that Revenue Ruling 86-7 is obsolete.

Applicability

The ruling is effective for contracts entered into on or after November 1, 2024. The IRS will not challenge a position taken prior to November 1, 2024, with respect to transactions occurring before that date by a taxpayer that reasonably relied on the conclusion in Revenue Ruling 86-7.

Further, the Commissioner has consented to taxpayers changing their method of accounting for MX contracts entered into on or after November 1, 2024, and waived the requirement to file a Form 3115. The change is made on a cut-off basis and thus is inapplicable to MX contracts that were entered into before November 1, 2024.

Implications

Revenue Ruling 2024-22 provides welcome guidance to taxpayers on the status of MX as a qualified board or exchange within the meaning of IRC Section 1256(g)(7)(C) with respect to contracts entered into on or after November 1, 2024. Taxpayers are encouraged to speak to their tax advisors regarding any pre-November 1 positions in light of the reliance language included in the ruling.