How do I pay income tax on ForEx earnings?

note: "forex taxes" applies u.s. traders only. foreign investors not residents or citizens of united states of america not have pay taxes on foreign exchange profits!


forex trading taxation - definition , overview:
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more , more investors on world accessing largest financial markets online through personal computers. demand surges foreign exchange trading, more , more u.s. traders have deal taxation issues @ end of year.

forex: taxed futures or cash?

currency traders involved in forex spot (cash) market, can choose taxed under same tax rules regular commodities [irc (internal revenue code) section 1256 contracts] or under special rules of irc section 988 (treatment of foreign currency transactions). irc 988 applies cash forex unless trader elects opt out.

advantage of section 1256 currency traders under section 1256, forex traders can have significant advantage on stock traders. reporting capital gains on irs form 6781 (gains , losses section 1256 contracts , straddles), forex traders allowed split capital gains on schedule d using 60% / 40% split. means 60% of capital gains taxed @ lower, long-term capital gains rate (currently 15%) , remaining 40% @ ordinary or short-term capital gains rate, depends on tax bracket trader falls under (as high 35%). results in average rate of 23%, 12% less regular (short-term) rate.

if cash forex subject section 988 rules, how can trader elect more beneficial section 1256 split? please read on find out more.

opt out or not opt out of section 988 !!

companies profit fluctuation in foreign exchange rates part of normal course of business, fall under section 988. means gains , losses foreign exchange (such buying , selling of foreign goods) treated interest income or expense , taxed accordingly. consequently, not receive beneficial 60/40 split.

since forex traders exposed daily exchange rate fluctuations, trading activity falls under provisions of section 988 - don't worry. irs wants nice (so far). because these daily fluctuations can considered part of currency trader's assets in normal course of business, irs gives trader option of rejecting (opting out) of section 988 , electing gains taxed under favorable 60/40 split of section 1256.

have opt out of section 988? though don't have file irs opt out, required "internally" before starting trade; i.e., must keep records in own books fact opting out of section 988.

many currency traders bend rules waiting after year on see if have gains trading activities. if do, claim elected out of irc 988 enjoy beneficial section 1256 treatment. on other hand, if sum of trades cash forex not positive, stick traditional section 988. since (under current tax law) becomes difficult disprove whether trader made election @ beginning or @ end of year, irs has not yet begun crack down on activity.

forex trader when tax time comes?

forex traders should receive 1099 forms us-based broker @ end of year stock , futures traders do. no matter in country forex broker based or tax-related reports provide, pull reports online accounts , seek of tax professional. no matter decide do, don't fall temptation of lumping trades section 1256 activity (if any). forex transactions need separated section 988 reporting.

given fact forex market 1 of fastest-growing financial markets around, might come under closer irs regulation. in meantime, traders continue enjoy tax advantages trading foreign currencies.



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i doing normal daily trading of eur/usd, trades lasting few hours on average. not sure if considered futures or securities , therefore don't know how pay taxes on it.

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