Do I Pay Forex Trading Tax In The USA?

Do I owe Forex trading taxes in the USA?

Yes, you owe Forex trading tax every time you make a profit on your trades. Traders are duty-bound at all times to be abreast of their tax liabilities by familiarizing themselves with America's tax regime as encapsulated by the Internal Revenue Code (IRC) which determines how much is to be paid. Traders should be able to independently ascertain how much they owe in Forex trading taxes or consult experts if need be. America's Forex tax regime can be quite complicated. It is not a walk in the park.

Best brokers for Forex trading in the USA

1

9.4/10

Go to broker

eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest.

Minimum deposit:

$50

Bonus for deposit:

0%

Regulation:

CySEC, FCA, ASIC

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

•the minimum transaction amount for copying is $1;

•handy functionality for passive investing;

•regulated by independent monitors;

•it is possible to purchase contracts for fractional shares (that is, to invest amounts less than the cost of one share);

•it is possible to buy shares at once (not CFDs) on the US stock exchanges.

•high spreads;

•periodic technical failures in order execution;

•lack of the most popular platforms such as MetaTrader 4 and MetaTrader 5 in Europe and the CIS;

•no access to ECN systems, orders are processed only according to the STP (straight-through processing) scheme with access to specific liquidity providers;

•there is a commission for withdrawing funds;

•impolite support staff;

•inconvenient website.

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2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

No minimum

Bonus for deposit:

0%

Regulation:

FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA

Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

Pros/Cons

•Minimum deposit from 1 dollar.

•A large selection of the most popular trading instruments.

•Several reliable and reputable financial regulators.

•Inconvenient and poorly functioning site.

•Lack of cent accounts.

•Lack of bonus programs.

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3

9.1/10

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Minimum deposit:

$1

Bonus for deposit:

0%

Regulation:

FCA, BaFin, ASIC, MAS, CySec, FINMA, BMA, CFTC, NFA

Review

IG Markets has been providing brokerage services for retail traders since 2014. It was established in 1974 in London to work with professional traders. It is a part of the IG Group with representative offices in 17 countries. IG Markets stocks are traded on the London Stock Exchange as a part of the FTSE 250 index. The broker is regulated by FCA (Financial Conduct Authority | the UK), CySec (Cyprus Securities and Exchange Commission), ASIC (Australian Securities and Investments Commission), BaFin (the Federal Financial Supervisory Authority | Germany), FINMA (Swiss Financial Market Supervisory Authority), and NFA (National Futures Association). The IG Group global representative office is supervised by BMA (the Bermuda Monetary Authority). The broker provides services of trading Forex and different CFDs through MetaTrader 4 and its in-house platforms for retail and professional traders.

Pros/Cons

•Regulated activities and participation in compensation funds;

•No minimum deposit requirements when opening an account with the international division;

•Leverage is available for trading currencies and CFDs;

•Wide range of trading assets and markets;

•Fee rebates for new and active existing clients with large trading volumes;

•Floating spreads from 0.6 pips for retail Forex traders;

•Bonuses for new clients and partnership programs for different client categories.

•The broker can reject opening accounts to traders with low capital or insufficient knowledge of derivatives trading;

•Deposits and withdrawals can’t be made with e-wallets, electronic payment systems, or cryptocurrencies;

•Trading conditions differ for various countries, so you have to look for the broker’s website in your country.

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Forex trading taxation in the USA: How it works

While paying taxes is a civic responsibility, tax evasion is a criminal offense that might put traders on a collision course with the law. In the United States of America, the Internal Revenue Code (IRC) as interpreted by the Internal Revenue Service (IRS) regulates Forex trading taxes. The IRC deems trading taxes as either a capital gain or income tax.

What to pay in taxes depends on whether you are filing your Forex tax return as a capital gain or income tax. Section 988 of the Internal Revenue Code provides for Forex trading tax as an income tax, while Section 1256 of the same code provides for Forex trading tax as a capital gain tax. To be eligible to file your tax returns under Section 1256 of the IRC code, you must trade in regulated futures contract markets, among other conditions.

Interestingly, you can legally avoid taxes or at least minimize your tax obligation to the barest minimum while maximizing profit. Traders can adopt tax avoidance mechanisms, including the use of tax-deferred accounts, trading through tax-exempt entities, and trading tax exempt foreign currencies.

Tax deferred accounts: One of the oldest tricks in the book of tax avoidance is the use of tax-deferred accounts, including 401(k)s and Individual Retirement Accounts (IRA). As you might have guessed, Tax deferred accounts allow you to postpone tax payments until you are ready to withdraw from the account. Hence, the money grows unabated until liquidation, when taxes will be charged at the prevailing ordinary income rate. This approach is best adopted by long-term Forex traders.

Trading through tax exempt entities: Trading through tax exempt entities including Forex trading foundations, partnerships, trusts, or charities, allows you to legally avoid paying personal income taxes on your trading profit. Instead, taxes are charged at a far lower rate at the trade entry level. This allows you to leverage the tax laxity afforded to these entities to maximize profit and minimize loss.

Trading tax exempt currencies: Forex trading basically involves buying and selling currency pairs for a profit. You will only be liable to pay taxes on trading profits if you are trading the currencies of countries with tax treaties with the United States of America. Trading currencies between countries without a tax treaty with the United States absolves you of tax liability. However, it is important that you comply with the country's tax regime. Countries like Argentina, Vietnam, and Chile do not have tax treaties with the USA. The downside to avoiding Forex tax in the U.S. by trading tax exempt currencies is that countries with trade viable currencies have tax treaties with the United States. Going through this route might greatly affect profit.

At the risk of sounding a bit unethical, many Forex traders also avoid taxation by declaring losses on their trades. You may want to consult tax experts for the implications of giving false information while filing your tax returns.

Tax rates for Forex trading income in the USA

As previously stated, the tax on Forex trading in the USA comes in two dimensions – personal income tax and capital gain tax. If you are filing your tax returns under Section 988 of the IRC, America's income tax rate, which ranges from 10% to 37%, applies, depending on filing status and declared income.

Globally, filing under the capital gains dimension is the most popular. Capital gains tax is charged when an asset, including real estate, stock, and currency pairs, is sold for a profit. Filing tax returns under Section 1256 means only 60% of your Forex trading profit will be taxed at 15%; the remaining 40% is taxed according to the income bracket and other important factors. It is important to keep in mind that the trader must hold the currency pairs for a period of time, ranging from a few days to a year, in order for the capital gain tax to apply to Forex transactions.

How much trading income is tax free in the USA?

Is Forex trading tax free in the USA? What is the USA's Forex trading tax rate? How much trading income is tax free? Similar questions must be satisfactorily answered before you decide to buy your first currency pair. Having sufficiently answered the question of whether Forex trading is tax free in the USA and the tax rate question, we shall sufficiently answer the question of how much trading income is tax free in the USA.

In the United States of America, no trading income is tax free. Your best bet is to legally avoid taxes to maximize profit by trading through tax free entities and other Forex tax avoidance mechanisms as discussed above.

Do I pay tax on US stocks?

Capital gains taxes are charged on US stocks if they are sold at a profit. The capital gain tax to pay varies according to the period through which the stock is held in your asset portfolio. Stocks held for a year or less are deemed as short term capital gains and are usually less than their Long term capital gain tax counterparts.

Suffice it to say that long term capital gain tax is charged on stocks held for more than one year before sale. The amount to pay as long term capital gain tax is dependent on your status and taxable income. It ranges from 0% to 20%.

Subjects of taxation in the USA

One of the perks of living in developed first world countries is the availability of social amenities that make life worth living. Countries, including the United States finance these amenities by taxing their citizens, residents, and business entities.

In the United States, there is no fundamental difference between taxes paid by citizens and residents. Residents and citizens alike are expected to file tax returns on incomes from rental property, wages, dividends, and royalties.

However, there is a slight difference between taxes paid by individuals and corporate legal entities. While taxes paid by corporate legal entities are pegged at a flat rate of 21%, individual taxes are not pegged at a flat rate. The amount payable in taxes mostly depends on status and earning capacity. Corporate taxes are calculated based on sales revenue, gross profit, and interest expense.

Tax benefits and exemptions in the USA

Forex traders in the USA enjoy several tax benefits, including capital loss deductions and market-to-market elections.

The capital loss deduction benefit allows traders to subtract trading losses from trading profits to be taxed. The purpose is to reduce trading losses as much as possible by allowing traders to recover trading losses before performing their tax obligations.

Market to market election tax benefit is only available to traders who trade as a business and not a hubby. It allows them to subtract trading expenses, including Forex brokers' fee from trading income before filing tax returns.

Case studies

Here are three case studies to illustrate the above-mentioned tax benefit for Forex traders in the United States.

1. Juliet is a graduate of a liberal arts college who is facing a grim job prospect in the labor market. With thousands of debts in student loans, she has decided to embrace Forex trading as a career path. The capital loss deduction benefit allows Juliet to deduct losses from profits on each transaction before filing her tax return

2. Dave is a 47-year-old professional trader who has found the best Forex broker to cater to his trading preference. However, the brokerage platform charges an arm and a leg in exorbitant transaction fees. Dave can leverage the market to market exemption to deduct the exorbitant transaction fees from trading profit before filing his tax returns

3. James recently heard from his childhood friend, Charlotte who is also a Forex trader like himself. Charlotte has moved to Europe where she is enjoying various tax benefits as a trader. James is curious to know whether there are tax benefits for U.S. based traders. A cursory look at the IRC code reveals that U.S. based traders enjoy tax benefits like market to market exemption and the capital loss deduction benefit

Taxation tips for Forex trading in the USA

1. Trade on user-friendly Forex broking platforms

2. Minimize loss by testing the water with demo accounts before pivoting into live accounts

3. Avoid tax legally by trading through deferred accounts, and tax-exempt entities

4. Reduce the amount payable in taxes by deducting trading expenses and losses before paying taxes on the remainder

5. Trade currencies of countries without trade treaties with the United States

6. Consult professionals for the best advice on tax avoidance mechanisms

Disclaimer:

This article was created for informational purposes. It should not be construed as offering tax advisory services. Please consult tax professionals for detailed professional tax services.