Sixth Circuit: “Foreign currency option” question | KPMG | GLOBAL

Sixth Circuit: “Foreign currency option” question remanded to Tax Court

Sixth Circuit: “Foreign currency option” question

The U.S. Court of Appeals for the Sixth Circuit today reversed and remanded to the U.S. Tax Court a case concerning whether a “foreign currency option” was within the definition of a “foreign currency contract” for purposes of section 1256.


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The case is: Wright v. Commissioner, No. 15-1071 (6th Cir. January 7, 2016). Read the Sixth Circuit’s decision [PDF 108 KB]


Section 1256 provides that an investor who holds certain types of derivatives at the close of the tax year must “mark to market” those derivatives by treating them as having been sold for their fair market value on the last business day of the tax year. A “foreign currency contract” is a “section 1256 contract” that an investor must mark to market at the end of the tax year. 

The taxpayers claimed that a foreign currency option is within the definition of a “foreign currency contract” under section 1256. The taxpayers claimed a large tax loss by marking to market a “euro put option” upon their assignment of the option to a charity. The taxpayers’ assignment of this option was part of a series of transfers of mutually offsetting foreign currency options that they executed over a period of three days. These transactions appeared to allow the taxpayers to generate a large tax loss at minimal economic risk or out-of-pocket expense. 

The Tax Court rejected the taxpayers’ attempt to generate a tax loss in this manner, finding that they could not recognize a loss upon assignment of the euro put option because their option was not a “foreign currency contract” under section 1256. 

The Sixth Circuit today found that while the Tax Court’s disallowance of the claimed tax loss made sense as a matter of tax policy, the plain language of the statute clearly provides that a foreign currency option can be a “foreign currency contract.” The decision was reversed and remanded to the Tax Court.

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