“1256 and Currency Contracts: It’s a Mess Inside,” in the compendium “Examining the Straddle Rules after 25 Years,” Tax Notes, Dec. 21, 2009 TNT 2009-12 Straddle FX
The decree of mark-to-market was imposed on futures contracts as an alternative to the balanced position rule, which was Congress’s primary weapon against the straddle shelters. The industry was outraged at the idea.
To forestall mutiny, Congress offered exchange-traded contracts governed by market-to-market a character advantage so attractive that immediately after enactment of the legislation, some non-exchange-traded contracts
clamored to come under the law as well. Observers present when mark-to-market was expanded claim that Congress intended the expansion to cover only foreign currency (FX) forwards. But modern readers of section
1256(g)(2) find no indication that one type of FX derivative should be treated differently from any other —whether it be a forward, option, or swap. And so out of the debates between tax archeologists and strict constructionists is born the beautiful mess of the taxation of FX derivatives