People new to forex trading often ask themselves how much will they have to pay on the gains they make, and, what if they lose money? Can they simply deduct them from gains or are they treated another way? Foreign exchange trading involves the buying and selling of currency pairs, with investors essentially making a prediction about which one of the two will rise in relation to the other. In the past decade, the size of the individual market for this kind of buying and selling has quadrupled, now representing a daily transaction value of approximately $5 trillion per day. The tricky thing for individuals who regularly earn money on the foreign exchange markets is taxation.
Every nation has its own tax laws and special ways of categorising personal income, whether it’s earned via a business venture, investing, or in the securities markets. After learning the ropes, daily traders move beyond asking the initial question of what is forex to how are earnings and losses treated on a tax return? Here is a summary of how to deal with forex income and losses at tax time, broken down by four sets of national laws. First, a warning in that no matter where you live, the only accurate way to understand and measure your tax liability is to speak with your personal financial expert, accountant, or lawyer. The following summary is for educational purposes only and you should not rely on it as tax advice.
In Canada, you have a choice to make. When you begin your forex activity, you can choose to treat the income/loss as capital or business-related. Whichever you choose, you have to stick with that category afterward. The pros of opting for capital treatment are that you only pay tax on profits at 50 percent of your personal rate, whatever that happens to be. The downside of opting for capital treatment is that you can only deduct 50 percent of losses against income. If you choose to go with the business-related category, you’ll pay your full personal rate on any increases but can deduct 100 percent of any losses. So, there are pros and cons of each option. Plus, the first $200 of profits are exempt from all taxation.
The general rule in U.S. law is that you can net your losses against your income. Then, if you still show a profit, you pay the long-term capital gains rate on 60 percent of the total and the short-term rate on 40 percent. The short-term rate is usually the same as your ordinary taxation bracket rate. The long-term rate is either 20, 15, or 0 percent, depending on which tax bracket you are in.
In Australia, the key factor is whether you are a trader or an investor. The former can deduct all their losses against whatever they earn. The latter can only net gains and losses together, rather than take a 100 percent deduction on losses. Likewise, for both groups, all gains are considered capital and usually taxes at the same rates as ordinary or business income, depending which category you are in. But, if your investments last longer than one year, they’re slotted into the long-term division and enjoy a 50 percent rate, which is quite similar to treatment of these kinds of gains in other countries. Keep in mind that there are some ambiguous rules about whether you can call yourself a trader. Just because you consider your activity a part-time job does not mean the ATO (Australian Taxation Office) will agree with you.
In the UK, there are three broad factors that determine your tax situation as a trader. The first, which is too complex to be treated here, is your income bracket and what’s typically called tax bracket. But, the second and third factors are also quite important, because they often are the sole determinants of whether you’ll be liable for gains or losses in a forex account. The second factor is whether you are an occasional speculator or an investor. Speculators simply do a trade every now and then and add the profits to their bank account, as they would if they won a small sum on a football bet.
Investors are actually engaging in a business-like activity, part-time or full-time, with the aim or earning a portion of their regular income from buying and selling currency pairs. Generally speaking, speculators pay no tax, but investors are liable for one of three kinds of taxation: corporate, capital gains, or ordinary income. The third factor is a bit simpler. You’ll not have to worry about taxes if you use spread betting, but will be on the hook for capital gains taxes.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.