How to pay tax on profits from forex trading? (2024)

Forex Taxes Explained

Traders must pay capital gains taxes when they sell a particular security at a higher price than the original purchase price. It goes without saying that traders do not have to pay taxes on transactions where they did not earn any payouts. To make profits, traders must understand the financial markets, and after achieving success, they must comply with local regulations. The exact method and rate of capital gains tax depends on the specific country. Here you will find the maximum capital gains tax rate for individuals in some countries:

• VS - 37%
• Depth - 20%
• Germany - 25%
• Greece - 15%
• Japan - 20,315%
• Russia - 13%
• United Kingdom - 20%
• Switzerland - 0%
• Sweden - 30%
• Spain - 23%

There are several things to take into account. First, many countries, including Russia, do not have a separate tax rate for capital gains. Instead, these profits are taxed at the same rate as personal income tax. A more important thing to mention here is the fact that these rates shown above represent the maximum capital gains tax rates. In many countries, the effective tax rate on this type of income may be much lower, depending on a person's total annual income and other circ*mstances.

Some countries distinguish Forex from other investments and treat them differently. For example, countries that consider Forex and CFD trading a form of spread betting generally have lower taxes. Capital gains tax is generally used to tax short-term and long-term investors who trade in physical assets such as physical stocks and physical precious metals such as: gold, silver and bronze.

Basics of Capital Gains Tax

How do you calculate the amount of capital gains tax that forex traders have to pay to their governments? Well, the exact calculation of the amount of capital gains tax to be paid involves two stages. The first thing traders need to do is calculate the so-called 'taxable income'. In the case of forex trading, this is the payout earned after the close of each currencywinning trade. For a better illustration, let's look at this 1-hour EUR/USD chart:

The opening and closing prices are shown with white arrows. As we can see in this chart, the EUR/USD pair was trading around the $1.1240 level at the beginning of the second half of June. When the pair rose to $1.1335, someone decided to open a long EUR/USD position by investing $10,000 with 1:10 leverage.

Over the following trading weeks, the euro steadily appreciated, reaching the level of $1.1742 in late July, when the trader decided to lock in profits and close the position. As the chart above shows, the euro made some further gains, reaching a level of $1.19. However, this was followed by a correction and recently the common currency traded around the $1.1760 level.

In our example, the trader has won 502 pips. Now if you invest €10,000 with a leverage of 1:10, this means that the size of the position will be €100,000, which corresponds to 1 standard lot. At the time of the closing trade, this position would be worth approximately $103,590. In this case, the broker gets back the $90,000 loan and the trader is left with the remaining $13,590.

Sincemarket participantsinvested $10,000 in this trade, the payout for this trade is $3,590. Traders are not taxed when they trade because profits and losses often change the balance of trading. Traders are taxed if they decide to transfer their earnings to their local bank account for daily use.

Finally, it is worth noting that traders do not have to perform complex tax calculations after closing each winning trade. Instead, the brokerage firm issues the document at the end of the tax year, showing the total profits or losses for the year. This allows market parties to use this number to submit tax returns.

Filing taxes on forex profits under section 988

Now let's move on to the question of how to file taxes as a Forex trader in the US. As mentioned earlier, traders have two options in this situation. The first option is for traders to report their trading income under Section 988.

This means that these capital gains are taxed as ordinary income. Here it is important to understand that US tax law distinguishes between short-term and long-term capital gains. The tax on long-term capital gains can range from 0% to 20%, depending on the size of annual income.

On the other hand, with Section 988, the amounts earned from Forex trading are treated as ordinary taxable income. So the actual amount that Forex traders will pay for their withdrawals depends on their tax brackets. Therefore, if the trader records his income under this section, the effective tax rate can range from 0% to 37%. To better illustrate this, let's look at this chart showing the 2020 tax brackets in the United States:

First, it's important to remember that the figures shown above only include taxable income before you start any calculations. The point is that every U.S. citizen and resident can choose between standard or itemized deductions. The standard deduction for single or married individuals filing separately is $12,400. For married individuals filing jointly, this deduction is $24,800.

So, for example, if two married people with a joint annual income of $150,000 decide to file jointly and take the standard deduction, their taxable income will be $100,000 – $24,800, or $125,200. As we can see from the graph above, they fall under the 22% tax bracket.

However, it is important to mention that this does not mean that they have to pay 22% of their entire taxable income. Instead, they pay 10% on $19,750, 12% on $60,500 and 22% on the remaining $44,950. Therefore, the total tax liability here would be €1,975 + €7,260 + €9,889, which equals €19,124.

We can conclude from this example that if the trader reports his trading income under section 988, the effective capital gains tax rate will range from 0% to 37%. On the one hand, if a trader's only source of income is forex trading and his or her annual earnings are $12,400 or less, the market participant does not have to pay income taxes.

On the other hand, the effective capital gains tax for traders whose other sources of income exceed $518,400 will be 37%. It goes without saying that the majority of forex traders fall somewhere between these two extremes.

Reduction of taxable income for forex losses

A major benefit to traders of reporting their trading income under Section 988 is the fact that they can use the total amount of their net loss to reduce their taxable income. To understand this better, let's take a look at this 1-hour USD/JPY chart:



Let's assume the trader opens a long USD/JPY position at the 107.14 level by investing $10,000 at 1:10accelerationjust like in our previous example. As we can see from the chart above, the pair moved largely sideways before dropping significantly in late July 2020.

Now let's assume that, faced with this downtrend, the market participant decides to cut his losses and liquidate the position at the 105.12 level. This means that at the time of closing, the market value of this transaction was $98,114. As in the previous case, the brokerage firm will take back the $90,000 loan, leaving the trader with the remaining $8,114. Considering that the market participant initially invested $10,000, the loss for this trade will be $1,886.

Now let's return to our example of the couple with an annual income of $150,000. If they suffer this trading loss, they can file their Section 988 trading return and reduce their taxable income by $1,886. This means that instead of $125,200, their taxable income will be $123,314. Since they are in the 22% tax bracket, this saves them $414.92.

Tax Laws for Forex Trading with Section 1256

Any good Forex tax manual will mention that traders have an alternative to reporting their income under Section 988. In fact, they may decide to report their annual amount of gains or losses under Section 1256.

In this case, 60% of the trader's annual income is taxed at a flat rate of 15%, while the remaining 40% is taxed according to the taxpayer's tax bracket, which can range from 10% to 37%. This can be an attractive option for traders with a tax bracket of 22% or higher.

To better illustrate this, let's return to our earlier example of the couple with an annual income of $150,000. Let's assume that $30,000 of the $150,000 comes from forex trading. Therefore, if the couple decides to transfer this income under Section 988, the effective capital gains tax rate is 22%. So the total amount of taxes payable would be $30,000 x 0.22, which is $6,600.

On the other hand, if they decide to file their trading income under Section 1256, in this case 60% of the amount, which is $18,000 of the $30,000, will be taxed at 15% and the remaining $12,000 will be taxed at 22%. . So the total tax amount is $2,700 + $2,640, which amounts to $5,340. So in this case, the couple can save $1,260.

As we can see from this example, many traders can save a significant amount of taxes by reporting their trading income under Section 1256. However, this has a significant drawback. The total loss claimable under this section is limited to $3,000 per year. This means that if a trader makes a net loss of $10,000 per year, a person can only reduce their taxable income by $3,000.

As a result, the choice between § 988 and 1256 will depend on the average income of the traders and on their tax brackets. For those market participants who often end up with net losses or are in the 10% or 12% bracket, filing under Section 988 may be a better option.

On the other hand, filing under Section 1256 may be a good choice for traders who consistently receive payouts and fall into the 22% tax bracket or higher. This choice therefore depends entirely on one's individual circ*mstances.

Pay taxes on forex trading outside the US

It goes without saying that each country's tax law has its own approach to taxing payouts earned from forex trading. In Great Britain, the tax-free allowance for capital gains is £1000. This means that if the total annual amount of capital gains is £1,000 or less, no tax is payable in this category.

For anything above this amount, the tax rate can range from 10% to 20%, depending on the taxpayer's total annual income. Since the first $1,000 earned is free of any tax, the maximum effective capital gains tax for traders will typically be less than 20%.

One thing that makes Britain an attractive place for traders is the fact that income from spread betting platforms is free from capital gains tax. Today, many brokers in the UK offer their clients the opportunity to trade Forex on diversified betting platforms. This seems to be beneficial for traders as they do not have to pay taxes on this type of income.

There is no capital gains tax in Switzerland. However, the fact is that people who are considered “professional traders” have to pay the same tax rate as self-employed people.

However, dealers can avoid this by holding each security for six months or more or by maintaining a low trading volume where the sale proceeds are less than 500% of the capital. Finally, traders whose realized capital gains are less than 50% of their annual income can also avoid "professional trader" status.

In Canada, traders pay the same rate as their income tax on 50% of their total capital gains. However, this tax reduction mainly applies to part-time traders. The full-time professional traders whose primary income comes from capital gains must pay income tax rates on all annual income.

Strategies to Reduce Taxable Income in Forex Trading

It takes some strategic planning to reduce taxable income when trading Forex from countries that charge capital gains taxes. The first and most basic step is to keep a detailed record of all your transactions, expenses and losses. By accurately documenting your trading history, you can maximize deductions and minimize taxable income. Counting net losses can help reduce taxable income by taking advantage of Section 988. Reducing taxable income is the most important option to reduce taxes onFX profit. You can file under Section 1256, where 60% of profits are taxed at a lower rate, but there is a $3,000 annual limit on trading losses. So calculate carefully whether this part is beneficial, depending on your profit.

Consider tax-efficient trading tools. Some trading instruments, such as spread betting, may be tax-free in Britain. This is an efficient way to speculate on Forex markets and pay zero taxes on profits. Knowing the tax laws on currency gains in your jurisdiction is key to reaping maximum benefits. Some regions may offer credits for specific trading activities. Check whether tax benefits exist in your jurisdiction. Consider income sharing strategies to divide income among your family members and distribute profits to lower tax brackets.

Try to find a tax professional or accountant who specializes in capital gains taxes to ensure you take full advantage of all the tax savings opportunities available in your area while complying with local regulations.

Tax Free Countries for Forex Trading

Taxes on forex trading can be a heavy burden for traders. Especially if we take into account that traders are charged different trading fees. Brokers have spread out fees, commissions, transaction fees, inactivity fees and swap fees. One of the most important goals in trading is to trade cost-effectively. If you are wondering how to avoid tax trading in forex, the easiest way is to find the countries where trading is not taxed. There are several countries to consider: the United Arab Emirates, Ukraine, Georgia, Monaco, Turkey, the British Virgin Islands, Brunei, the Bahamas, etc. These countries have no capital gains tax or personal income tax. Reducing the cost of fees and taxes is just as important as dealing with a regulated broker.

Forex trading and taxes

Forex taxes are different in every country. Some countries, such as Great Britain, do not tax small Forex traders who earn up to a thousand British pounds per year. Entrepreneurs are taxed based on their income level and status. Entrepreneurs who work in institutions are taxed as regular employees. Retail traders are taxed based on their income level and whether they invest in securities or trade CFDs. CFDs stand for Contracts For Difference and are taxed in the same way as gambling in many countries. Professional trading is far from gambling, but trading CFDs on currencies, shares, indices and other derivatives is a form of spread betting. Because speculators do not actually own the underlying assets, they pay taxes when they decide to transfer money to their bank accounts. As we have already mentioned, there is an opportunity to avoid taxes by using Forex tax-free countries. There are specific Forex trading tax calculators for traders from certain countries. Forex tax calculators help traders calculate how much they should give to their government.

How to file tax returns on currency trading

Although the rules may vary from country to country, the basic premise is the same. A trader must keep detailed records of his trading activities to declare both profits and losses. This helps document both losses and gains and calculate whether a profit has been made. Of course, losses are not taxable, only gains. It's super important to know how to comply with authorities if you aretrade for life. Profits are typically taxed when the trader transfers profits from his investment account to his bank account. Here's the list:

Keep detailed records of all trading activities

It is important to keep accurate and detailed records of all your forex trading activities, including trade dates, amounts, currency pairs traded and trading costs. This is not an easy task, which means traders must record all their trading positions and save them for later use for tax purposes.

Understand the tax treatment

Depending on the country and jurisdiction, taxation of profits or capital gains varies. Policy on percentages and tax bands are different and knowing which category your profits fall into can make a difference to the amount of profit you make at the end of the trading year.

Determine tax status

You need to understand whether you are considered an investor or a trader for tax purposes. This classification is super important and can affect your taxable gains and losses. Depending on the jurisdiction, the percentage and methodology for each classification will be different.

Reportable income

You must report all income from currency trading profits. This includes both realized and unrealized gains. Include all sources of income, such as interest earned on margin accounts, and so on. Most countries will not tax unrealized profits, also known as the open trading positions that make a profit. However, not all jurisdictions are friendly to traders and knowing these details is crucial.

Tax forms and applications

Most countries require traders to fill out special tax forms for reporting investment income or capital gains (gains). Familiarize yourself with these forms so you can complete them correctly, and consult with tax professionals to ensure compliance in your state.

Tax Tips for Forex Traders – Key Options

• In many countries, forex traders must pay capital gains taxes on their net trading income. Instead of paying for each winning trade individually, traders must report the total annual amount when they file their tax returns. The real estate agency usually provides this information.
• In the US, traders can choose to file their trading income under Section 988 or 1258. In the case of Section 988, this income is taxed at the same rate as the individual's tax bracket, which ranges from 0% to 37%. With § 1258, 60% of income is taxed at a flat rate of 15%, while the remaining 40% is taxed as ordinary income.
• Section 988 may be preferable for traders who suffer frequent losses or are in the 10% or 12% tax bracket. For traders who earn consistent payouts and are in a 22% tax bracket or higher, Section 1258 may be a more attractive option.
• In general, CFD trading is not taxed in the same way as investing.

Frequently Asked Questions: Forex Capital Gains Tax Treatment

Why do some countries have no capital gains tax?

There are countries in the world, including New Zealand, Georgia and Ukraine, that do not charge capital gains taxes on trading in stocks, commodities or currency pairs. One of the most obvious reasons for this policy is to make these countries more attractive to international traders and investors.

The point is that there are a significant number of people who make most of their income through investing or trading. Some of them may therefore consider moving to countries that do not have capital gains taxes and save a lot of money in the long run.

What is Form 8866 in US tax law and how can sellers use it?

If a trader loses $2 million or more in one year, or $4 million in a combination of two years, the trader may be eligible to file Form 8866. This form allows traders to receive tax relief after incurring such losses. cases are quite rare. In most cases, this form is completed by large companies that specialize in forex or stock trading.

Why is spread betting exempt from capital gains tax in the UK?

Spread betting is essentially the only product that is exempt from both capital gains and stamp duty under the Forex Trading Tax UK, as well as in Ireland. The reason behind this is that spread betting is treated in UK tax law in essentially the same way as betting on horse racing, sports and other similar activities.

The point is that business owners can maintain their tax-exempt status as long as they have other sources of income sufficient to support themselves. On the other hand, if spread betting is the trader's only source of income, there is a risk that he or she will be classified as a 'professional gambler' by the UK tax authorities. In this case, the trader is taxed at the same rate as the self-employed.

How does capital gains tax work for other types of investments?

Tax authorities in most countries do not make a clear distinction between payouts from forex trading or stock trading. So do you have to pay tax on Forex? Yes, but in most cases the method and tax rates for these two categories are usually the same.

However, this is not the case when investing in real estate. Many countries have separate capital gains tax rates for real estate and for other assets. It is also worth noting that investors in the United States, as well as in some other countries, can defer payment of capital gains taxes when selling the home by purchasing other real estate with the proceeds from that transaction.

Finally, in many countries there is no capital gains tax on the sale of a property as a primary residence after two or another specified number of years have passed since the original purchase.

What is the tax rate for foreign currency income called?

Taxes are different in every country. Some countries do not tax Forex or stock trading. Income from trading is subject to capital gains tax. In the US, traders are taxed under section 1256. Under this section, 60% of profits are taxed at a rate of 15%. And 40% of profits are taxed at current income tax levels. However, the IRS does not treat forex traders and stock traders the same. Forex traders pay taxes under Form 1040 or Form 1040NR in the US.

How to file taxes for forex trading?

To file business taxes, you must report your capital gains and losses. Capital gains are profits from the sale of securities. However, Forex trading is considered a speculative activity and is not given the same treatment as investing in stocks and other securities. If you act as an institutional trader, you will be taxed just like any other salaried person. If you are a retail Forex trader, you must report your profits and losses. Forex retail traders use a Form 1040 or Form 1040NR in the US.

How is Forex taxed?

Every country has its own rules when it comes to taxes. Generally, Forex income is taxed as capital gains tax. If Forex is your side business and not your main source of income, you will not be taxed in the UK. In Britain, forex traders earning up to £1,000 a year do not have to pay tax. Forex trading is treated differently than investing. CFD trading or spread betting is taxed in the same way as gambling in most countries.