Yes, forex traders must pay taxes on their profits; however, rules and regulations vary depending on your country of residence.
Traders must keep meticulous records of their trading activities to ensure they pay all applicable taxes, especially if trading with an overseas broker.
Taxes applied to profits earned from forex trading are treated like any other investment income and must be declared when filing their taxes. Therefore, traders should keep a performance log so as to accurately calculate annual gains and losses.
Forex trading can be taxed in different ways depending on its form of execution: currency futures on an exchange or spot forex over-the-counter market. Before beginning trading year, traders must choose one type or the other and file accordingly; both come with advantages and disadvantages depending on losses and gains and your tax bracket.
Profits earned from foreign currencies in the US are taxed at a higher rate than domestic currency profits, however some countries offer treaties which prevent double taxation by permitting you to offset foreign currency profits with domestic currency losses.
Forex trading losses may be subject to taxes in some countries; the exact tax treatment depends on how you trade forex; for instance, traders using spread betting accounts do not owe taxes, while those trading OTC market are subject to different rates than those trading exchanges.
Traders must keep accurate records of both unrealized and realized gains and losses to determine how much tax they must pay. Furthermore, it is vitally important that these transactions are split off in financial records in order to prevent over-recognizing of income.
OTC traders can choose between reporting their profits as capital gains to the IRS or using one of two simpler taxation treatments offered under Section 1256 or 988 for their taxes. OTC trading allows traders more freedom with regards to balancing losses against earnings; you can use your brokerage statement each year to identify your net trading losses that should be included when filing your return.
Capital gains, or profits you make from selling assets such as stocks or real estate, tend to be taxed at a lower rate than ordinary income. Federal taxes on capital gains often vary based on how long an asset was held before selling and how much total income you have; the longer an asset remains held up front the higher its tax bracket will become.
Unrealized capital gains do not account for inflation and, thus, may exceed actual price levels. For example, if you purchased an investment for $100 and later sold it for $300, your nominal capital gain would amount to $200.
Some states also levy an income tax on capital gains. As of 2018, only the top 1% of households received 69% of realized long-term capital gains and 90% went to those in the top 20%, with some laws taxing unrealized gains as part of taxable income while others do not include them at all; taxing these gains as they accrue could generate greater revenue while eliminating opportunities for sheltering strategies.
Taxes in the United States
United States taxes include federal, state and local levies on income, payroll, property, sales, capital gains dividends imports estates gifts. Cities and municipalities may levy additional income taxes. This content should only be taken as general information and should not be taken as legal advice or taken as accounting advice from EY. Tax legislation and administrative practices may change over time – for more details please contact your local EY office in New York as this website contains interpretation of laws and regulations of New York.