Quote from Stok:
Seems to me with IB, the IRS will never know what, if any, profits are made in forex. It's the honor system, lol.
It's the honor system for stock transactions as well. Your broker only reports proceeds from sales, not your cost/basis in the stock that you need to compute P/L (although this will be changing for stocks purchased starting next year).
As for forex with IB, I do two things.
1) I record every forex transaction on my own spreadsheet. Yes, it's a lot of work (I'm over 9k lines this year) and it's complicated by the fact that commissions are paid in base currency which isn't necessarily the currency you are getting your forex profits in. But it helps me keep track of my trading results. This, however, isn't what I use for IRS reporting.
2) For tax reporting, I provide gross P/L on form 6781. This figure is roughly the same as shown on my spreadsheet but is calculated from my annual account statement that IB provides. Figures that go into my calculation include net purchases/sales of foreign currency, foreign stock purchases/sales, foreign stock dividends, USD commissions, opening and closing foreign currency balances, etc. Basically, anything that happened in the account related to foreign currency that isn't already reported elsewhere on my tax return.
The benefit of method 2 (from an accuracy standpoint) is that it takes into account changes in foreign currency that happen after a trade is completed. For example, say I buy AUD with borrowed NZD and have a profit of 1000 NZD after I close out the trade. Say this 1000 NZD is worth 700 USD, the amount recorded on my spreadsheet. But what happens to the 1000 NZD? Eventually it might be converted into USD when the rate is different than it was when I closed out the trade. So there's some additional P/L that won't show up as a trading profit.
I think the spreadsheet is probably good enough for tax purposes if you want to go that route. But I wouldn't submit it with my tax return. Just retain it in case questions are asked later.
Good luck!
