Electric,
Have you seen this essential guide for US forex and futures traders from last year's (April 2004) Futures magazine?
http://www.greencompany.com/EducationCenter/GTTRecCurrency.shtml#futuresmag
Let me quote a key part, just in case.
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"
Here is a good accounting solution for cash forex
Money managers report cash forex trading gains and losses using a âPerformance Record Approach.â
These results are sufficient for tax authorities and reporting rates of return to investors. Use the same formula in a worksheet for your tax return. Hereâs the formula to use on a worksheet template.
Ending net assets (at market value) less beginning net assets (at market value), less additions of cash, plus withdrawals of cash, equals net performance. Subtract non-trading items such as interest income, add interest expense and other expenses and you have net trading gains or losses on cash forex.
If you donât elect out of IRC 988, you report your ordinary gain or loss from cash forex as âother incomeâ on Form 1040 (line 21).
If you elect out of IRC 988, add this amount to Form 6781 as âcash forex elected out of IRC 988.â
Your monthly statements may get you lost in the woods. If you try to figure out your cash forex gains and losses from your monthly brokerage statements, you may get very confused and lost.
We have clients that have different statements for each type of currency (e.g., U.S. dollars, Japanese yen, Swiss francs and Euros) and it can become a nightmare scenario to try and figure it all out. The performance record approach is a salvation and itâs accepted by the IRS."
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Note especially the 3rd paragraph above, describing the formula. Now, I am no tax expert, but, having studied Robert Green's 2005 book "The Tax Guide for Traders" (highly recommended, BTW), here's how I would answer your question. Hypothetically, if you somehow managed to execute the same forex trades (relatively short-term) at more than one dealer, your bottom-line federal tax should be nearly the same between the 2 types of forex dealers you mention. Differences would be due solely to the variations in interest debit / credit rates themselves, whether explicit or implicit.
However, the (very simple) computation required to get there will be different on your part.
In the first case, explicit interest dealer, you need to deduct the net annual interest (= credit - debit) from the yearly NAV change. As you know (but others may not), Oanda, for one, sends out ONLY a 1099-INT to you and the IRS; there is NO 1099; it's up to the trader to compute from the annual statement and self-report, based on an honor system, the NAV change on your tax return to the IRS.
In the second case, price adjusting dealer, unless you get a 1099-INT, you don't deduct anything from the yearly NAV change. Note that I have not had first-hand experience with such a dealer, so this part is just my attempt at a logical interpretation. Of course, the lovely body of work affectionately known as the IRC (Internal Revenue Code) can, shockingly, on rare occasions, be less than logical...
