The rules for federal income taxation of foreign exchange trading are light years behind the developments in the marketplace. The Internal Revenue Code is stuck in 1984, when foreign exchange trading was a vastly different, and much smaller, world.

Back then, nearly all foreign exchange trading was conducted between banks (or other financial institutions) or through regulated futures contracts. Spot foreign exchange trading at the retail level hardly existed in 1984; today, it is one of the biggest (by dollar value) markets.