“My question is, when my foreign currency increases in value, how will I report it?”--->Report foreign currency gain as other income on 1040 line 21.OR Sch D of 1040 if t is treated as LT(St)CG/LT(ST)CL
“I have had it for over a year. Will the profit be considered a capital gain? or will it be filed as regular income.”----> The IRS treats profits and losses from foreign currency exchange trading as ordinary profits and losses for tax purposes, according to the U.S. tax code. Per IRS rules, most gains from foreign currency transactions are to be treated as ordinary income, whether earned by an individual or a corporation. Losing traders prefer the ordinary loss treatment because it eliminates capital loss limitations. Thus, most traders can enjoy the full ordinary loss deduction against any type of income by reporting the profit or loss from cash forex trades as other income on line 21 of IRS Form 1040.However, profitable traders prefer the more favorable tax treatment of capital gains and losses on foreign currency exchange trades in major currencies under Section 1256. The IRS gives lower tax rates under that section, so it reduces these traders' taxes on trading profits. IRS taxes apply to only 40 percent of any short-term capital gain or loss and 60 percent of any long-term capital gain or loss. This means that 60% of the capital gains are taxed at the lower, long-term capital gains rate ,currently0%~ 15%, and the remaining 40% at the ordinary or short-term capital gains rate, which depends on the tax bracket the trader falls under as high as 35%. This results in an average rate of 23%, which is 12% less than the regular short-term rate.ALSO, traders using Section 1256 can take a three-year carryback on losses against profits for the prior three years on profits and losses declared under Section 1256. Trades on forex over-the-counter ,OTC,options do not qualify for this provision. The confusion on IRS tax laws on foreign currency exchange trading stems from the lack of one uniform law to govern forex trading.