Foreign futures exchange is a "qualified board or exchange" for section 1256 mark-to-market treatment

Plain-English summary

Certain futures and similar contracts get special tax treatment under section 1256: they are treated as if sold at year end (mark-to-market), with gains and losses split 60% long-term and 40% short-term. That treatment applies only to contracts traded on a "qualified board or exchange." A U.S. exchange registered with the SEC or designated by the Commodity Futures Trading Commission (CFTC) automatically qualifies, but a foreign exchange qualifies only if the IRS determines its rules are adequate to carry out the purposes of section 1256. Here a foreign electronic futures exchange, which the CFTC had already registered as a foreign board of trade allowing U.S. participants direct access, asked the IRS for that determination. The exchange made a series of representations: it will keep records for at least five years, maintain a U.S. agent to accept IRS summonses, collect U.S. taxpayer identification numbers, require its trading participants to meet broker reporting rules under section 6045, and give the IRS access to records. Based on those representations and the CFTC registration, the IRS determined the exchange is a qualified board or exchange under section 1256(g)(7)(C). The ruling is conditioned on the exchange keeping those commitments. This matters because it lets U.S. traders on that foreign exchange use the favorable section 1256 tax rules.

Ruling snapshot

• Question: Is a foreign, CFTC-registered futures exchange a "qualified board or exchange" within the meaning of section 1256(g)(7)(C)?
• Outcome: Approved (determined to be a qualified board or exchange, conditioned on its representations)
• Key authorities: IRC § 1256(a), (b), (g)(1), (g)(7)(C); § 6045 (broker reporting); § 7602

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202506011
Third Party Communication: None
Release Date: 2/7/2025
Date of Communication: Not Applicable
Index Number: 1256.07-05
Person To Contact:
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Refer Reply To:
CC:FIP:B02
PLR-122630-18
Date:
October 23, 2024

Legend:

Exchange = --------------------------------------

Entity A = -------------------------------------------

Country X = ---------------------------------------------

Directive = ------------------------------------------------------------------------
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Country X Exchange Act = ---------------------------------------------------------

Date A = -----------------------

Date B = -------------------------

Article X = -------------

Income Tax Treaty = ------------------------------------------------------------------------
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Exchange Rulebook = --------------------------------------------------------------------

Dear -------------------:

This is in reply to your letter dated June 26, 2018, and subsequent correspondence, requesting a ruling that Exchange is a "qualified board or exchange" within the meaning of section 1256(g)(7)(C) of the Internal Revenue Code.

FACTS

Entity A is a joint stock corporation under private law registered in Country X.
Exchange is a public law institution with partial legal capacity in Country X. Entity A operates Exchange. Entity A provides financial, personnel, and material resources to the Exchange. Exchange is a regulated market in accordance with Directive and the Country X Exchange Act. Exchange is a fully electronic exchange. Only trading participants admitted to Exchange may trade at the Exchange (hereinafter referred to as "Exchange Trading Participants"). The requirements for being admitted as an Exchange Trading Participant are set out in the Country X Exchange Act and Exchange rules that provide comprehensive supervision and are based on the Country X Exchange Act.

In a letter dated Date A, the Commodity Futures Trading Commission ("CFTC") granted no-action relief to Exchange permitting it to make its electronic trading and matching system available in the United States to Exchange Trading Participants, notwithstanding that Exchange was not designated as a contract market or registered as a derivatives transaction execution facility pursuant to section 5 or 5a of the Commodity Exchange Act ("CEA"). Subsequently, the CFTC finalized rules that require registration of foreign boards of trade ("FBOTs") that wish to provide U.S. participants direct access to the FBOT's electronic trading system, including those with existing no- action letters. Registration of Foreign Boards of Trade, 76 Fed. Reg. 80674 (Dec. 23, 2011).

On Date B, the CFTC granted an Order of Registration to Exchange as an FBOT allowing Exchange to permit Exchange Trading Participants located in the United States to enter trades directly into Exchange's order entry and trade matching system.

Section 48.2(b) of the final CFTC rules regarding FBOTs provides, in part, that an FBOT must possess the attributes of an established, organized exchange; adhere to appropriate rules prohibiting abusive trading practices; and enforce appropriate rules to maintain market and financial integrity.

Section 48.5(d)(2) provides that the CFTC evaluates, among other things, whether the FBOT and its clearing organization are subject to comprehensive supervision and regulation by the appropriate governmental authorities in their home country or countries that is comparable to the comprehensive supervision and regulation to which designated contract markets ("DCMs") and derivatives clearing organizations ("DCOs") are respectively subject under the CEA, CFTC regulations, and other applicable United States laws and regulations.

Section 48.5(d)(5) provides that the CFTC will look to determine if the government authorities support and enforce regulatory objectives in the oversight of the FBOT and the clearing organization that are substantially equivalent to the regulatory objectives supported and enforced by the CFTC in its oversight of DCMs and DCOs.

Section 48.7 provides, in part, that the CFTC requirements for registration include rules providing that the automated trading system of the FBOT meets certain international standards, that contracts to be made available in the United States contain specified terms and conditions, that the clearing organization complies with certain international standards or the clearing organization registers with the CFTC as a DCO, and that the FBOT has implemented and enforces rules to ensure compliance with these and other CFTC requirements.

Exchange makes the following representations.

(1) Exchange holds a valid CFTC Order of Registration as an FBOT.

(2) All Exchange contracts are subject to a system of marking to market whereby gains are credited to accounts and losses are subjected to margin calls on a daily basis.

(3) Under Article X of the Income Tax Treaty, the Service may gain access to information held by Exchange with respect to U.S. taxpayers.

(4) Exchange will maintain an agent for service within the United States, to receive and accept any request for information, summons, or subpoena from the Service or from any grand jury properly convened within the United States, which is related to the taxation of transactions in futures contracts traded on Exchange by any person.

(5) The supplying by Exchange of its records to a U.S. grand jury or to the Service will not be a violation of, or inconsistent with, the law of Country X.

(6) Exchange will retain its records respecting derivatives trading on Exchange for a minimum of five years.

(7) Exchange will collect from all Exchange Trading Participants that either have or are required to have United States taxpayer identification numbers their United States taxpayer identification numbers and, on request, will provide such information to the Service.

(8) Exchange will identify a senior management contact of each Exchange Trading Participant and, on request, will make such information available to the Service. On request, Exchange will ask Exchange Trading Participants to identify their other executive officers to the Service.

(9) Exchange will provide such further information and assurances as may from time to time be requested by the Service in order to verify Exchange's entitlement to the determination under section 1256(g)(7)(C) of the Code.

(10) The Exchange Rulebook has been amended, approved, and will be maintained to require the following:
a) Exchange Trading Participants that are subject to the reporting requirements of brokers under section 6045 of the Code and the Treasury Regulations thereunder shall comply with such requirements, as amended from time to time, with respect to transactions effected on, or otherwise subject to the Rules of, Exchange in the manner prescribed by section 6045 of the Code, the regulations thereunder, and such other provisions of the Code and regulations that are pertinent thereto. Failure of an Exchange Trading Participant to comply with this provision will result in immediate suspension of such Participant's membership privileges on Exchange (and the privileges of any successor to such Participant) until the Participant complies with these reporting requirements in all respects.
Such compliance includes the filing of all returns that were required to have been filed under section 6045 but were not filed or were filed improperly.
b) In addition to the requirements of the Exchange Rulebook, upon request by Exchange, Exchange Trading Participants (with respect to transactions occurring on Exchange) will supply to Exchange or directly to the Service or any grand jury properly convened within the United States all books, papers, records, or other data as described in section 7602 of the Code and the Treasury Regulations thereunder (hereinafter collectively referred to as "records"). Such requests will be made by Exchange whenever Exchange receives a written request, summons, or subpoena to produce such records from the Service or from any grand jury. Failure of an Exchange Trading Participant to comply with this provision will result in immediate suspension of such Participant's trading privileges on Exchange (and the privileges of any successor to such Participant) until the Participant complies with these reporting requirements in all respects.

LAW AND ANALYSIS

Section 1256(a) of the Code provides, in general, when gain or loss on section 1256 contracts will be recognized and how such gain or loss will be treated for federal income tax purposes.

Section 1256(b) of the Code provides, in part, that for purposes of this section, the term "section 1256 contract" means any regulated futures contract.

Section 1256(g)(1) of the Code provides that the term "regulated futures contract" means a contract (A) with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market and (B) which is traded on or subject to the rules of a qualified board or exchange.

Section 1256(g)(7) of the Code provides that the term "qualified board or exchange" means –

(A) a national securities exchange which is registered with the Securities and Exchange Commission,

(B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or

(C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section.

Based on the foregoing and the CFTC Order of Registration of Exchange as an FBOT, we determine that Exchange has rules adequate to carry out the purposes of section 1256 of the Code and is thus a qualified board or exchange within the meaning of section 1256(g)(7)(C) of the Code. This ruling is conditioned on the representations set forth above and compliance therewith.

Except as specifically ruled upon above, no opinion is expressed or implied concerning the federal tax consequences relating to the facts discussed or referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of this request for a ruling, it is subject to verification on examination.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

_______
K. Scott Brown
Senior Technician Reviewer, Branch 2
Office of the Associate Chief Counsel
(Financial Institutions and Products)

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