Tax Forex for Forex Traders By TradersAccounting. Forexthe foreign currency exchange market, can be a lucrative one indeed for traders skilled in its dynamics. But when income tax time rolls around, currency traders receive special treatment from the Internal Revenue Service, the subtleties of which can sometimes trip up the unsuspecting.
Forex is traded in two ways: Many forex traders are active in both markets. Because futures and cash forex are subject to different tax and accounting rules, it is important for forex traders to know which category each of their trades fall into so that each trade can be reported correctly to receive optimum tax advantage.
Forex traders receive a significant tax advantage over securities traders under Section But things get a little more complicated tax-wise if you dabble in cash forex, which is subject to Section Treatment of Certain Foreign Currency Transactions.
Section was enacted as a way for the IRS to tax companies that earn income from fluctuations in foreign currency exchange rates as part of their normal course of business, such as buying foreign goods. Because forex futures do not trade in actual currencies, they do not fall under the special rules of Section But as income currency trader, you are exposed daily to currency rate fluctuations, hence your trading activity would fall under the Section provisions. Obviously, some traders strategies this rule based on their year-end outcome, and there seems little inclination on the part of the IRS to crack down, at least so far.
As a rule of thumb, if you have currency gains, you would benefit reduce your tax on gains by 12 percent by opting out of Section Forex futures traders tend to breeze through tax time; their brokerage income sends them an Forex Formon which their aggregate profit or forex is listed on Line 9.
As a fast-growing market segment, forex trading is almost certain to come under greater IRS scrutiny in the future. An experienced Traders Accounting tax professional can help you file in full compliance with IRS rules and make the most of your tax advantages. For more information, visit TradersAccounting. Proprietary Trading Firms Best of Traders Log Trading Software Chicago Traders Group. LightSpeed Trading Avatar Securities.
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