Paying taxes is really the last thing a new foreign exchange trader should care about, but it is definitely a serious issue for any profitable trader. Correct handling of one's taxes is not only ethical but will help to avoid unnecessary problems and expenditures in the future.
The first thing to know when you start wondering how to pay taxes in Forex trading is that you should definitely consult a certified tax advisor. This guide is not a detailed explanation of how to pay taxes on Forex profits, it is just a short overview of some tax modes existing in the industry. Additionally, it offers some observations on how most traders deal with this issue.
Some countries, such as the USA, Canada, and the United Kingdom do not offer an option of tax withholding by Forex brokers. At the same time, many European countries (such as Germany, Italy, and Russia) make it simpler for traders to pay their dues by assigning a fiscal agency status to the brokerage company. In the majority of developed countries, currency trading is taxed at capital gains rates while the rest apply a normal personal income tax rate to such profits.
US traders have two regimes at their disposal: 1256 contracts and 988 contracts. The former is the default one for futures/options trading (which is taxed as 60%
The United Kingdom and Ireland offer an opportunity for FX traders to earn tax free profits — spread betting. Unless it is the individual's primary source of income, spread betting is considered gambling and is not taxed at all in those countries.
What is normal in most of the European countries is that a broker, which is usually based in the trader's country of residence, would withhold my taxes. This becomes more difficult when traders operate via foreign brokers — usually they just have to pay taxes themselves. Normally, the tax rate is the same as on any other income.
Judging by various online polls and surveys, it appears that a large majority of traders doesn't pay any taxes on their Forex income — mostly because either they are unprofitable or their profit is too small to bother reporting it.
UK traders enjoy their tax-free spread betting tax regime and rarely opt-out of it. US traders mainly report their earnings under the section 1256 as it is the default one.
If you want to share your thoughts on paying taxes on Forex trading profits, please use our Forex forum to discuss this issue with other traders.
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