To put that into perspective, it is 12 times greater than the average daily turnover on the global equity markets and more than 50 times greater than the average daily turnover on the NYSE. Trading in foreign currencies has been around for thousands of years. In fact, some of the first known currency traders were the Middle Eastern moneychangers who exchanged coins to facilitate trade. Given a market this size, it is no surprise that the taxation of forex remains a complexity to most traders and tax professionals.
Section transactions, the default method of taxation for currency traders, treats the gains or losses from forex transactions as ordinary gains or ordinary losses. If you have forex gains, they are taxed as ordinary income, subject to which ever tax bracket you fall under. Let's look at an example:. If you lose money trading FOREX, your losses are treated as ordinary losses, and can be used to offset any other income on your tax return.
Let's use Joe as an example again:. In my opinion, if a trader is not consistently profitable and has other earned income on their tax return, they should stay under the Section taxation to be able to fully utilize any losses that come from FOREX trading. I'll explain why at the end of the article. The maximum tax rate on ordinary income currently is The IRS requires a trader to make the election to opt out of Section tax treatment internally, meaning you make the opt out election in your own corporate books or records.
You do not have to notify the IRS in advance, as you do if you were making the mark to market election. I'd personally suggest having your opt out election notarized, which would help solidify your claim of a timely election if you got audited.
Opting out of Section tax treatment for forex traders is a no-brainer decision for profitable traders due to the tax savings. However, it also makes sense for traders who are not consistently profitable yet but also don't have any earned income on their tax returns. If a trader has an ordinary loss and no earned income to offset it against, the ordinary loss ends up being wasted as it cannot be carried forward to future tax years.
If you opt out and elect Section tax treatment, the loss can be carried forward and used against future capital gains. If you are still uncertain as to whether to opt out or not, please seek out the advice of a knowledgeable trader tax specialists to assist you with this decision. Learn more about Ribble's firm here. He is a leading authority on trader taxation and trading entities.
Steve is a highly sought after public speaker and works with traders from all over the United States, putting in place proactive strategies to minimize their taxes. He can be reached at info ShrinkMyTaxes. Let's look at an example: Let's use Joe as an example again: Here is a comparison of ordinary tax rates vs.
Please do international students in America trading forex pay tax. Am I missing something? It doesn't make sense that you would combine the tax rates.
They both tax different totals. Isn't the highest income bracket being taxed only Visitor - Siraj Ali: I'd personally suggest having your opt out election notarized forex trading strategies. I have 2 forex account. Last year one has net gain while the other has net loss.
I have regular wages to offset the loss. Can I treat the account with loss as ordinary income loss and treat the account with gain as capital gain? Sign-In to Comment Name: SteveRibble Member SinceMore...