Tax for Forex Traders – How are forex traders taxed? Before engaging in live forex trading, it is essential to know about your tax liabilities. Only once you are aware of them, you can plan your strategy and trade accordingly.
Did you know different forex instruments are taxed in different ways?
If not, we will help you out. Our analysis will help you stand taxation rates. Once you are aware of it, it is essential to keep in mind while calculating your tax.
Also, most brokers abide by the rules and regulations of the countries where they operate. Therefore, deviating from your tax requirement is never advisable. Keeping that in mind will help you use our guide to your advantage.
How are Forex Traders Taxed?
We will detail the taxing of 2 different forex instruments below. We will also go into the details of constituents of those forex instruments.
1. Forex options & futures:
When you’re trading in Forex options and futures, 60% of your profits or losses are considered as long-term capital gains or losses. On the other hand, 40% is counted as short term.
While comparing this with stocks, if you sell shares in less than one year, the tax rate will be the same as your regular income. In most cases, you might end up paying a higher tax rate than the one proposed above for forex options and futures. The effective tax rate for forex options and futures comes to around 23%. Thus, when you’re indulging in Forex trading of options or futures, you are saving on taxes.
2. Forex spot traders:
Forex brokers allow you to spot trade forex as well. The main difference in spot trading is these are labeled as foreign exchange transactions. If you lose money in your first year, you can count all of your losses. In the case of profits, your profits are considered as interest income. The tax on them will be as per your ordinary income tax rate.
When you compare both, It is beneficial to trade in forex options and futures rather than in Forex spot trading. However, a lot also depends on the trading strategy you are planning to follow.
How to keep track of your tax liability?
The question is, how can you keep track of the tax liability?
There are a few approaches possible.
1. Tax reports from your brokers:
Most tax brokers can provide you with direct tax reports. Once you input the tax rate, it will be taxed at the ordinary tax rate; it is easy to know your tax liability. You will not have to compute it based on the result of every trade manually. You have to check out the features of the broker to know if the broker provides you with such reports.
2. Manual calculation:
For manual calculation, compare the balance at the end of the year and the beginning of the year. After that, factor in the deposits. Once you do so, you have to consider the trading expenses. Only when you do so, you can decide the profit you have made. So, it is better to use an online tool to calculate the profits or the losses you have made.
When it comes to forex taxes, it is essential to understand the type of asset you are trading before making the calculations. Based on the kind of forex instrument, the tax rate changes. So, keep in mind, our guide only provides an introduction to “Tax for Forex Traders“; be sure to consult your accountant or CPA for more detail information.