IRC § 1256 Contracts and Revenue Ruling 2013-5
A focus on asset managers
Generally, certain regulated futures and foreign currency contracts (among other financial instruments described under IRC § 1256) that are traded on a 'qualified board or exchange' meet the requirements for mark-to-market treatment for tax purposes, with such resulting gain or loss treated as 40% short-term capital gain/loss and 60% long-term capital gain/loss.
In Revenue Ruling 2013-5 (the "Ruling"), the Internal Revenue Service ("IRS") recently ruled that contracts entered into on or after March 1, 2013 on the Eurex Deutschland Exchange, a regulated exchange in Germany, meet the requirements under IRC § 1256(g)(7)(C) to be a qualified board or exchange, as long as:
- The U.S. Commodities Futures Trading Commission ("CFTC") continues to allow Eurex Deutschland to provide direct access to its electronic trading and order matching system from the United States under an existing no action letter, pending CFTC approval or an order of registration; or
- Eurex Deutschland holds a valid order of registration as a foreign board of trade ("FBOT").
Specific issues for asset managers
The Ruling provides that a change in the treatment of Eurex Deutschland contracts to comply with the new Ruling is a change in method of accounting within the meaning of IRC §§ 446 and 481, and the regulations thereunder. The Commissioner grants consent to taxpayers, who hold a Eurex Deutschland contract that was entered into on or after March 1, 2013, to not file Form 3115, Application for Change in Accounting Method, if the taxpayer changes to the IRC §1256 mark-to-market method of accounting for the first taxable year during which the taxpayer held the contract. Because the change is being made on a 'cut-off' basis, there is no potential omission or duplication of income or deductions, and therefore no adjustments under IRC § 481 are required.
General tax issues
IRC § 1256(g)(7) provides that the term 'qualified board or exchange' means:
- A national securities exchange which is registered with the Securities and Exchange Commission,
- A domestic board or trade designated as a contract market by the FCFTC, or
- Any other exchange board of trade, or other market which the Secretary determines has rules adequate to carry out the purpose of IRC § 1256.
Eurex Deutschland is a regulated exchange in Germany. The CFTC issued in 1999, and later amended in 2004 and 2006, a letter that granted Eurex Deutschland no-action relief, which allowed United States members to trade through Eurex Deutschland's electronic trading system, notwithstanding that the CFTC had not designated Eurex Deutschland as a contract market pursuant to sections 5 and 5a of the Commodity Exchange Act.
On December 23, 2011, the CFTC published final rules regarding the registration with the CFTC of FBOTs, including those with existing no-action relief ("the CFTC FBOT registration system"), for an effective date of the final rules of February 21, 2012.
Under the CFTC FBOT registration system, the CFTC may issue an order of registration to an FBOT, allowing the FBOT to provide direct access to its electronic trading and order matching system from the United States. The CFTC FBOT registration system replaced the CFTC's no-action relief system. Under 17 CFR 48.6(c), an FBOT with an existing no-action letter (like Eurex Deutschland) may continue to rely on the letter until the CFTC either revokes the letter or grants that FBOT an order of registration under the new system.
View the FBOT's status under the CFTC no-action relief system and the CFTC FBOT registration system here.
A comprehensive list of non-US exchanges that meet the requirements to be a qualified board or exchange under IRC § 1256(g)(7)(C) are listed below:
- International Futures Exchanges (Bermuda) Ltd. (Rev. Rul 85-72)
- Mercantile Division of the Montreal Exchange (Rev. Rul 86-7)
- Mutual Offset System – partnership between Chicago Mercantile Exchange and Singapore International Monetary Exchange Limited (rev. Rul. 87-43)
- ICE Futures (Rev. Rul. 2007-26)
- ICE Futures Canada Inc. (Rev. Rul 2009-24)
- Dubai Mercantile Exchange (Rev. Rul. 2009-4)
- LIFFE (Rev. Rul. 2010-3)
- Eurex Deutschland (Rev. Rul. 2013-5)
For additional information or questions, please contact:
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165
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