Before I begin, I gotta throw out the necessary disclaimers. First, I am not a tax professional, just a fellow citizen of the FX world trying to help my fellow FX fanatics understand one of the most confusing aspects of the Forex trading business: Therefore, I am not making any recommendations on how anyone should handle their taxes. This is for informational purposes ONLY, and hopefully when you DO consult a tax professional, this article will help you ask the right questions.
Secondly, the following points I am about to discuss are for U. Taxes differ per country, so it would be best to consult a local tax professional in your own region. As a budding Forex trader in the U. Section and Section Both of these sections were initially made for forward contracts, but over time, they have also carried over to apply to spot Forex transactions.
This has its perks and its drawbacks. Section states that an individual or a monster, in the case of Cyclopip has the ability to claim capital losses as an income tax deduction. According to Pipcrawler , it helps to impress the ladies! By definition, a capital loss is when you sell an asset for less than what it cost you, such as in the case of a losing trade.
Capital gains, on the other hand, occur when you sell an asset for more than its cost. Now, deduct your total capital losses from your capital gains and you have your NET capital gain or NET capital loss, depending on whether you ended up positive or not.
The beauty of Section is that in the event your capital losses exceed your capital gains as in the case of a net capital loss , you can claim the excess as a deduction from your other sources of income.
By paying a proportion of your taxes under the lower tax rate, you can effectively lower the total amount of tax paid on your capital gains. It enables you to deduct your net capital loss from other types of income.
On the other hand, if your trading activity results with a net profit, Section is preferred because it allows you to have a lower overall capital gains tax rate. And with rules and regulations constantly changing, the best thing to do to avoid accounting mistake and end up with huge fines—or the IRS at your door—is to go consult a tax professional or an accountant…do it now! Vision without action is a daydream.
Action without vision is a nightmare. Partner Center Find a Broker. With a last name like Ninja, I decided long ago to specialize in espionage.
And with my first name being Forex, you guessed it, my other pasison was, well, anything and everything FX. Naturally, I decided to combine my two loves into one, "spying" on the forex industry which I call "espipionage.
I also profile existing companies that are making an impact on retail forex traders, all for your benefit. Set your night vision goggles ON. More from Forex Ninja.More...