7582. What is a forward contract? What is the difference between a futures contract and a forward contract?Nuco Employeercline202014-06-27T18:24:00Z2014-06-27T18:24:00Z24122355Summit Business Media195276214Site Map/Investments/Futures/Section 1256 ContractsTaxFactsDefaultArticle2006-01-04T00:00:00Z121051074-00-tf2.xml1074.00;#1884;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2What are futures? What is a regulated futures contract?
2300.00000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:04:02Z7582. What is a forward contract? What is the difference between a futures contract and a forward contract?Forward contracts (or “forwards”), in contrast to futures, exist only in the cash market, are not subject to CFTC regulation, are not standardized as to terms and provisions, and do not involve a variations margin. All terms and provisions of a “forward” are subject to negotiation between the buyer and seller.A taxpayer who enters into a forward contract to deliver property that is the same as or substantially identical to an appreciated financial position that he or she holds (See Q 7605) will generally be treated as having made a constructive sale of that position.IRC Sec. 1259(c)(1)(C). But not all forward contracts will be subject to constructive sale treatment.See General Explanation of Tax Legislation Enacted in 1997 (JCS-23-97), p. 176 (the 1997 Blue Book). According to the Blue Book, a forward contract results in a constructive sale only if it provides for delivery, or for cash settlement, of a substantially fixed amount of property at a substantially fixed price. If the amount of property provided for by the forward contract is subject to significant variation under the terms of the contract, it will not constitute a forward contract.See Rev. Rul. 2003-7, 2003-1 CB 363. Furthermore, an agreement that is not a “contract” under applicable contract law, or that is subject to “very substantial contingencies,” was not intended to be treated as a forward contract.1997 Blue Book, p. 176.However, the Service distinguished a case in which, in addition to entering into a forward contract pledging to deliver property that was the same as or substantially identical to an appreciated financial position that he held, a taxpayer loaned and delivered the shares to the other party at the time of the contract. In that case, the IRS found a constructive sale.TAM 200604033.For those forwards that do result in a constructive sale under IRC Section 1259, unless certain requirements are met for closing out the forward contract, the constructive sale generally will result in immediate recognition of gain by the taxpayer as if the appreciated financial position were sold and repurchased on the date of the deemed saleIRC Sec. 1259(a). (See Q 7605 to Q 7607).A taxpayer who enters into a forward contract to acquire an equity interest in a pass-through entity may be subject to the “constructive ownership” rules under IRC Section 1260 (See Q 7608 to Q 7609).