When you trade foreign exchange or Forex, you aren’t just buying and selling the value of different currencies. You are also making a bet about where the value of those currencies is going to go in the future. This is essentially gambling on future movements of these currencies, and tax implications can be complicated. Each trader will have different needs and circumstances that can impact how they report their profits or losses from Forex trading. The following guide will explain everything you need to know about taxes and Forex trading.
Over-the-Counter (OTC) Investors
One class of Forex traders to keep in mind while discussing taxes are OTC investors. These traders are typically considered to be “speculators” because they use short-term trades to make a profit on the movements of currencies. These investors don’t often take on any currency risk and simply speculate on the future movement of currencies. Instead of trying to hedge against risk or protect their capital for long periods. The tax implications for OTC investors can be complicated and are dependent on several factors. Such factors include;
• The amount invested.
• How often do they trade
• How much profit they make
• And what type of trading account is used.
These traders need to consult with an expert who can help them understand their tax obligations before filing their taxes at the end of each year.
Which Contract to Choose
There are two types of Forex contracts: a spot contract and a swap contract. Spot trading is when you buy and sell currencies directly on the open market. This will usually come with a fee, but the trade will settle immediately. Swap trading involves the exchange of one currency for another at an agreed-upon rate on a date in the future. The contract size for Forex trades can range from 100 to 1,000,000 units, so it’s important to choose wisely before entering your trade.
Forex Options and Futures Traders
Forex options and futures traders are subject to different tax implications. Forex options traders owe taxes on their profits when they are realized. Forex futures traders owe taxes as soon as they make a profit because it’s considered a capital gain.
Forex taxes are complicated. The best way to avoid any issues is to find an experienced tax professional that can speak to the specific needs of the kind of trades that you are doing.
If you are an OTC investor, there are no tax implications on the money that you make from your trades. If you trade stocks, you will be taxed on your gains at a rate of 15%. Any other type of financial instrument trades will be taxed at the same rate.
An exchange traded option or future trade will be taxed at the same rate as a stock trade. If you trade futures, like crude oil, again, you will be taxed on your gains at a rate of 15%. If you are unsure about which kind of contract you are trading or about any other tax questions, ask your tax professional before making a trade. They will know the best solutions for your business.