50. Commodity Trading

Trading in commodities includes "cash" (or "spot") and "futures" transactions. Most commodity traders deal in futures, i.e., contracts that specify future delivery of a given commodity in a particular month and at an agreed price. Commodities traded in this manner include grains such as wheat, corn, and barley; foodstuffs such as cocoa, sugar, and pork bellies; crops such as cotton and wool; and metals such as silver, copper, and palladium.

Hedging vs. Speculating - The two types of traders in commodity futures are the hedger and the speculator. The former relies on a futures market as a hedge in his or her business operations, which consist primarily of producing, selling, or processing commodities. Hedging transactions generally result in ordinary income or loss for tax purposes, since they constitute a form of business insurance to protect the person who uses the commodity in his or her business against possible losses due to fluctuations in the market price of the commodity. The speculator, on the other hand, assumes the risk of market fluctuations with the expectation of realizing a profit.

Tax reference verification 1-800-829-1040