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 Code¹ Section 1256.² The 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.³ Section 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.

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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 | menna.eltaki@ey.com
• Liz Hale, Washington, DC | liz.hale@ey.com
• Matthew Stevens, Washington, DC | matthew.stevens@ey.com
• Ravi Manne, Charlotte | ravi.manne1@ey.com

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Endnotes

All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

Historically, many practitioners believed that only foreign currency forwards, not options, could constitute a foreign currency contract. See Notice 2007-71, in which the Internal Revenue Service states that it and the Treasury Department do not believe that foreign currency options are foreign currency contracts as defined in Section 1256(g)(2). Whether foreign currency options are included in Section 1256 is now uncertain given Wright v. Commissioner, 809 F.3d 877 (6th Cir. Jan. 7, 2016), in which the Sixth Circuit held that OTC foreign currency options could be foreign currency contracts.

Section 1256(b)(1)(B).

While there is a single currency, renminbi, there are both offshore and onshore rates and it is not clear whether these should be considered separate currencies for Section 1256 purposes. We found limited trading for the onshore currency rate on a Section 1256 qualified board or exchange.

The Colombian Peso was delisted from ICE Futures US on 10 May 2021. Previously, we have only found the Colombian Peso to be traded on ICE Futures US.