This Global Tax Alert provides an updated list of foreign currencies that are traded on qualified boards or exchanges for purposes of beginning the analysis whether an over-the-counter contract (OTC) with respect to those currencies should be marked to market under Internal Revenue Code1Section1256.2The list contained in this Alert updates the list of foreign currency futures contracts that was provided in a priorEY Global Tax Alert, dated 22January 2018. Please note that 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 a Section1256 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 in the RFC affects whether an OTC contract can be considered a Section1256 contract. Some RFCs on the list appear to have no trades in 2018. A complete lack of RFC trades (or perhaps sporadic trades or limited volume) would prevent OTC contracts from qualifying as Section1256 contracts.Therefore, the list should not be viewed as definitive, but rather as a starting point in the analysis.
Under Section1256(a)(1), each Section1256 contract held by a taxpayer at the close of the tax year must be marked to market. The term Section1256 contract includes, among other things, any foreign currency contract.3The term foreign currency contract is defined under Section1256(g)(2)(A) as a contract that:
- 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
- Is traded on the interbank market
- Is entered into at an arm’s-length price determined by reference to the price in the interbank market
The legislative history provides 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, orcross currency pairs, as of the date of this Alert.Generally, cross-currency contracts should also be marked to market under Section1256 if such contracts are actively traded in the futures markets. Even if the specific contracts are not themselves traded, if each of the underlying currencies to a particular contract is individually actively traded in the markets, cross-currency contracts made up of those currencies may also be subject to Section1256(a).4If only one leg of a cross-currency contract is traded in regulated futures contracts, then that contract should not generally besubject to Section1256.
Please find the following currency contracts listed or offered for trading by qualified boards or exchanges. As noted, although each of these contracts is listed, some show little orno trading in the past year.
1. Australian dollar
2. Brazilian real
3. British pound
4. Canadian dollar
5. Chilean peso
6. Chinese renminbi (CNH, the offshore Chinese currency)
7. Chinese renminbi (CNY, the onshore Chinese currency)
8. Colombian peso5
9. Czech koruna
10. Euro
11. Hungarian forint
12. Israeli shekel
13. Indian rupee
14. Japanese yen
15. Korean won
16. Mexican peso
17. New Zealand dollar
18. Norwegian krone
19. Polish zloty
20. Russian ruble
21. South African rand
22. Swedish krona
23. Swiss franc
24. Turkish lira
As described previously, provided that there is sufficient trading of these currencies through regulated futures contracts, and the additional conditions described in Section1256(g)(2)(A) are satisfied, foreign currency contracts with respect to these currencies should be marked to market under Section1256(a)(1). Certain currencies, while listed as being offered for trading, had little or no actual trading in 2018. For example, while there was minimal trading in the Czech koruna, Hungarian forint and Polish zloty single futures contracts, there was active trading in the cross-currency pair contracts that involved those currencies. Additionally, certain other contracts, such as the Colombian peso/US$ cross-currency future, had limited trading. Therefore, it is important that a taxpayer understand the RFC trading environment around the time it enters into any OTC foreign currency contract, as well as the trading environment throughout the life of the contract.
As described previously, 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. There has been an increase in the number of offered currency RFCs in recent years that end up being thinly traded or not traded at all.
Scope
Please note that this list does not immediately reflect changes in the status of foreign currencies, but is instead generally updated only annually.
