Forex Trading in the USA - Is it legal? Do I Pay Taxes?

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Forex trading is a huge market with a trading volume that spans billions of dollars. These markers offer beginners and experienced traders an opportunity to gain a profit from an initial investment but also come with high risks. In fact, some reports state that up to 90% of individuals who decide to partake in forex trading will end up with a loss. These losses are often caused by a failure to implement risk management and in situations where the individual does not take extra care to educate themselves before trading with real money.

Regardless of your experience level, it is still possible to utilize the forex markets as a way of driving profits for yourself. In this guide, you'll learn more about forex trading in the United States. We take a closer look at various elements that you need to understand before you set out to start your journey while also sharing a few of the top brokers that are licensed for trading in the US.

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What Is Forex Trading?

Forex trading is often viewed as an investment strategy, with a focus on staking funds as a way of gaining profit on them. The process involves the exchange of one currency for another. For example, you may choose to exchange USD for GBP. The idea behind the exchange is the profit in the process. You would hold the exchange position for a certain period of time, then close the position. Upon closure, the currencies are exchanged backward - in the example; the GBP is exchanged back to USD.

Forex trading also refers to a global marketplace. The daily trading volume within the marketplace is currently over $6.6 trillion, making it one of the largest markets in the world. While there are certain cases where a person may turn to a forex exchange to obtain a specific currency, such as when traveling, the term “forex trading” generally refers to activities that aim to profit from these trades and exchanges.

Is Forex Trading Legal in the USA?

Due to the regulations that the US government authorities have established in terms of certain financial activities, some people are not sure whether they can legally trade forex inside the country. Fortunately, it is not considered illegal to participate in forex trading activities for individuals who reside in the United States.

It is important to note that there are limitations and certain regulations that you need to comply with. Failure to follow the regulations set out by the US government could cause you to participate in forex trading activities that are considered illegal.

The most important law to abide by while trading forex in the US is the fact that any broker utilized by a local citizen needs to be regulated by a US-based authority. Additionally, the regulations also state that the company you use for forex trading needs to have an active and valid license to provide these services within the United States. Fortunately, brokers will generally be happy to share details of such regulatory authorities and licenses - many will provide these details readily on the homepage of their websites.

How Much Money Do I Need to Start in Forex?

There is no set value that will account for every individual who is looking to start with forex trading. Some people prefer to start out with an insignificant amount of money, as this helps to limit their losses should the positions they open turn out to fail. With this said, note that a small investment means any gains on successful trades will also feel insignificant.

Generally, the golden mean in terms of initial investment is $500 to $1,000. While this may seem like a more significant amount to invest, it provides you with an opportunity to really explore the forex markets, and you'll be able to gain more substantial profit from the successful trades in your portfolio.

In addition to considering the "golden average," make sure you also understand that each broker has its own specific minimum deposit. When you make a deposit on the platform, you'll need to add at least the minimum amount, or you won't be able to continue with the deposit process.

US Forex Brokers Minimum Deposit Amount Comparison

Forex.com Interactive Brokers

Minimum Deposit

$100

$0

Best Forex signals in US - top 5 providers

How to Begin to Trade Forex in the USA? A Step-by-Step Guide

When you are completely new to forex trading in the US, then there are a few steps you should ideally take to maximize the potential of your portfolio. In this section, we share four specific steps that you should follow. Each of these steps plays an important role in helping you start your forex trading journey while also focusing on minimizing the risks that you will face throughout the process.

Step 1. Choose a US-Regulated Forex Broker

Trading in the US is legal, but only if the broker you utilize for your trading activities is regulated by the appropriate local authorities. This is the main factor that you need to keep in mind when you are choosing a forex broker.

In addition to considering the regulation and licensing of these brokers, you should take a few extra factors into account as well. Make sure you understand the commission fees that are charged by the broker. Also, look for any specific tools or functions the broker offers that you can use to create a passive income on the platform. This way, you’ll often be able to set up automated trades to help you gain consistent profits in the long run.

Step 2. Explore Demo

Once you have chosen a broker, you may feel tempted to make your first deposit and start trading. Before you do, however, it is important to first experiment a bit with what is called a "demo account." Most of the regulated forex brokers that are available to US citizens will offer a demo account for free. The demo account comes pre-loaded with "fake" funds that you can use to initiate trades from your side. This will help you get a better idea of how trading works and give you an opportunity to activate trades without having to risk real money.

Step 3. Test Your Strategy

You need to develop a strategy that will work for you. There are many strategies to choose from, but what is most ideal for you depends on your situation. Be sure to consider factors like the amount of time you have available to monitor the markets, as this will have a major impact on what the most appropriate strategy would be for your trades. You also need to consider how much knowledge you have accumulated, as some trading strategies are more advanced than others.

The major element that you should consider when developing a strategy for trading is risk management. At a beginner stage, you may find yourself facing greater risks. With an appropriate risk management strategy, you'll find it easier to limit your losses while still giving yourself an opportunity to profit from the trades you initiate.

Step 4. Learn, Learn, Learn

As a beginner, knowledge and experience are the two most valuable elements, you will discover while you are exploring the forex market. This is why you should always ensure you continue learning more about forex trading and the variety of strategies that can be utilized in the process. This is also why we recommend you start out with a demo account, as this no-risk option allows you to gain experience in the market while eliminating any risks that come with unsuccessful positions.

Best Time to Trade Forex in the US

The Best Time to Trade Forex - TU Research

There are a couple of things you need to keep in mind when you plan on trading. When it comes to forex trading, even from the United States, you need to keep in mind that you will sometimes find yourself with interest in trading in international markets. This is why it is important to have a thorough understanding of how different time zones affect the ideal time to initiate trades and exit your trading positions.

If you are planning to trade with USD, NZD, and AUD, then you'll likely want to keep watch of Pacific time. Trading in this timezone happens between 22:00 GMT and 07:00 GMT. For markets that involve JPY, you need to keep in line with Asian region trading times, which are active between 23:00 GMT and 09:00 GMT.

For trades that involve EUR, GBP, and CHF, be sure to keep trading times associated with the European region in mind. These trades can be initiated and closed between 08:00 GMT and 17:00 GMT.

In some cases, there are sessions overlapping each other. This helps to diversify your selection of trading pairs. For example, Tokyo and Sydney have overlapping sessions between 23:00 GMT and 07:00 GMT. You’ll also find an overlap between London and Tokyo sessions between 08:00 GMT and 09:00 GMT. Take note of these times when there are overlaps in the sessions, as this makes for the perfect time to initiate international trades.

Best US Forex Brokers For Beginners

There are several brokers that can be used in the United States, but some tend to offer a more trusted range of services than others. We will take a closer look at the top three forex brokers that you can rely on when you are only starting out your journey.

Forex.com

Forex.com is one of the most popular forex brokers that are available for individuals in the United States. The company is regulated by the National Futures Association, as well as the Commodities Futures Trading Commission. The minimum deposit is $100, and the company offers an app that can be used to trade.

Interactive Brokers

Interactive Brokers has developed a platform for traders and investors. There is a global market that can be utilized when trading on the platform. With no minimum deposit, you can start with minimal investment, further reducing the risks you undertake. The CFTC and US SEC regulate the services Interactive Brokers provide to citizens in the United States.

Do I Pay Forex Taxes in the USA?

Yes, you do need to pay taxes on earnings that your forex trading activities accumulate. Futures contracts and forex options are both classified as IRC Section 1256 contracts. There is a consideration of 60/40 tax that is payable on earnings you make through your forex activities. A 40% of the gains and losses you make through your trading account are considered to be short-term taxable figures, while the remaining 60% are long-term taxable figures.

How Much Can I Earn?

How Much Can You Make Trading in Forex in 2024?

There is no fixed amount of money that you will earn when you participate in forex trading activities. Too many elements come into play when it comes to calculating your earning potential. One of the major factors that affect the profit potential of forex trading is the amount of money you initially invest. When you are able to put more into each position you open, then you’ll be able to gain a higher profit if you close the position at the right time. Additionally, the number of wins and losses your account experience will also have a significant impact on how much you are able to earn.

FAQs

Is forex trading profitable in the USA?

Shortly, yes, forex trading remains profitable regardless of where you reside. The major factor that your residence affects is the specific brokers that you will have access to. This, however, does not necessarily make forex trading less or more profitable, but it is still important to keep in mind the fact that some brokers offer advanced tools to help you trade more efficiently.

Is forex banned in the US?

Even though there are strict restrictions in place to regulate factors that involve risky financial activities, it is important to note that the US has not banned forex trading. With this said, there are regulations regarding how you can participate in trading activities if you reside in the United States. The broker that you use needs to be registered and licensed to provide its services within the borders of the US.

How can I trade forex in the USA?

With the right information on hand, getting started with trading in the USA should not pose a challenge. Start by understanding how much you are going to invest in forex trading, then choose a broker. Make sure the broker you opt for is regulated, as this ensures you will comply with local laws while trading forex.

Is forex riskier than stocks?

In general, experts do advise that forex trading tends to hold more risks when compared to stocks. With this said, it is important to understand the fact that one important reason why people experience a greater level of risks is that many fail to implement appropriate risk management steps. The volatility of the forex market does not only add risks, however, as this can be utilized in order to drive higher profits amongst focused traders.

Team that worked on the article

Chinmay Soni
Contributor

Chinmay is a certified Investment Analyst and Portfolio Manager by the National Stock Exchange (NSE) Academy. He is currently associated with a $75 million VC fund and assists them in identifying and researching investable sectors and start-ups. He has completed his Bachelors of Business Administration from the Institute of Management, Nirma University and is currently pursuing MBA majoring in Finance from the same. He has 4 years of hands-on investment experience in a variety of asset classes and his professional qualifications include being a CFA Level 2 candidate and NSE Certified Market Professional Level 2.

He finds writing as a way to express his thoughts and share his knowledge with people eager to learn. He himself happens to be an avid reader of personal finance books and on top of his recommendation list are the international bestsellers ‘The Psychology of Money’ and ‘Think and Grow Rich’

He has this one strong belief as his motto: Life is what you make of it.

Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.

Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.

Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.