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 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 Tax Alert, Updated US list of foreign currency futures contracts - starting point for IRC Section 1256, dated 3 March 2022.

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 (or perhaps only limited trading) in the RFC may prevent an OTC contract from qualifying as a Section 1256 contract. 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 which is defined under Section 1256(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 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.

Australian dollar

Brazilian real

British pound

Canadian dollar

Chilean peso

Chinese renminbi⁴

Czech koruna

Danish krone

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 there is sufficient trading of these currencies through regulated futures contracts, and the additional conditions described in 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 a 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 Section 1256 applies to a particular currency.

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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

Jeffrey Chai | jeffrey.chai@ey.com

Menna Eltak | menna.eltaki@ey.com

Liz Hale | liz.hale@ey.com

Amy Snyder | amy.snyder@ey.com

Matthew Stevens | matthew.stevens@ey.com

Ravi Manne | ravi.manne1@ey.com

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

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Endnotes

1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.
2. On 5 July 2022, the U.S. Treasury Department and the IRS issued proposed regulations under 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 EY Tax Alert, Proposed regulations would limit IRC Section 1256 mark-to-market accounting for foreign currency contracts to foreign currency forward contracts, dated 14 July 2022.
3. Section 1256(b)(1)(B).
4. 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 Section 1256 purposes.