This Tax Alert provides an updated list of foreign currencies that are traded on qualified boards or exchanges 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 Internal Revenue Code1Section 1256.2The list contained in this Alert updates the list of foreign currency futures contracts that was provided in EY Global Tax Alert,Updated US list of foreign currency futures contracts - starting point for IRC Section 1256, dated 27 January 2021.
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 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 in the RFC affects whether an OTC contract can be considered a Section 1256 contract. Some RFCs on the list appear to have had no trades in 2021. A complete lack of RFC trades (or perhaps only sporadic trades or limited volume) would prevent OTC contracts from qualifying as Section 1256 contracts.Therefore, the list should not be viewed as definitive, but rather as a starting point in the analysis.
Under Section 1256(a)(1), each Section 1256 contract held by a taxpayer at the close of the tax year must be marked-to-market. The term Section 1256 contract includes, among other things, any foreign currency contract.3Section 1256(g)(2)(A) defines the term foreign currency contract 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, or cross currency pairs, as of the date of this Alert. Although each of these contracts is listed, some show little or no trading in the past year, as noted.
Australian dollar
Brazilian real
British pound
Canadian dollar
Chilean peso
Chinese renminbi (offshore)4
Colombian peso5
Czech koruna
Euro
Hungarian forint
Israeli shekel
Indian rupee
Japanese yen
Korean won
Mexican peso
New Zealand dollar
Norwegian krone
Polish zloty
Russian ruble
South African rand
Swedish krona
Swiss franc
Turkish lira
As described previously, foreign currency contracts with respect to these currencies should be marked to market under Section 1256(a)(1), provided these currencies are sufficiently traded through regulated futures contracts, and the additional conditions described in Section 1256(g)(2)(A) are satisfied. Certain currencies, while listed as being offered for trading, had little or no actual trading in 2021. For example, the Chilean peso and Colombian peso each had very limited trading during the year, with the Colombian peso being de-listed from ICE Futures US in May 2021. Additionally, while there was minimal trading of single futures contracts in the Norwegian krone, Swedish krona, Israeli shekel, Czech koruna, and Hungarian forint, there was active trading in the cross-currency pair contracts involving those currencies. Therefore, it is important for taxpayers to 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.
Please consult with one of the individuals listed below before adopting the position that Section 1256 does or does not apply to any particular foreign currency 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.
Scope
Please note that this list does not immediately reflect changes in the status of foreign currencies, but is instead generally updated only annually.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services – Capital Markets
- Menna Eltaki,Chicago
- Liz Hale,Washington, DC
- Matthew Stevens,Washington, DC
- Ravi Manne,Charlotte
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
