How do taxes work for forex trading?

[I]Continuation from previous post…[/I]

[B]Here is a good accounting solution for cash forex[/B]

Money managers report cash forex trading gains and losses using a �Performance Record Approach.�

These results are sufficient for tax authorities and reporting rates of return to investors. Use the same formula in a worksheet for your tax return. Here�s the formula to use on a worksheet template.

Ending net assets (at market value) less beginning net assets (at market value), less additions of cash, plus withdrawals of cash, equals net performance. Then subtract non-trading items like interest income, add interest expense and other expenses and you have net trading gains or losses on cash forex.

If you don�t elect out of IRC 988, then you report your ordinary gain or loss from cash forex as �other income� on Form 1040 (line 21).

If you elect out of IRC 988, add this amount to Form 6781 as �cash forex elected out of IRC 988.�

Your monthly statements may get you lost in the woods. If you try to figure out your cash forex gains and losses from your monthly brokerage statements you may get very confused and lost.

We have clients that have different statements for each type of currency (e.g. US dollars, Japanese Yen, Swiss Francs, and Euros) and it can become a nightmare scenario to try and figure it all out. The performance record approach is a salvation and it�s accepted by the IRS.

[B]My broker reported my cash forex along with my IRC 1256 contracts, is that ok?[/B]

A few brokers lump in cash forex in with IRC Section 1256 contracts on 1099 line 9 �aggregate profit or loss.�

This is technically incorrect by law, but it may save you taxes and an accounting headache.

Technically, cash forex are IRC 988 transactions and should be segregated from IRC 1256 contracts.

Perhaps, these brokers can argue that when you opened your cash forex account, you �contemporaneously� elected out of IRC 988 for IRC 1256 treatment, and that you qualify for such as a trader rather then a manufacturer type business.

You should consult with a trader tax expert if this case applies to you.

Also consider what happens if you have a large cash forex loss and you prefer ordinary loss treatment instead of Section 1256 treatment � so you don�t get stuck with the capital loss limitation of $3,000?

You face difficulty in overriding a broker�s 1099 treatment for 1256 contracts. Consult with a trader tax expert who may be able to help.

Cash forex is the �wild west� of trading and IRS reporting
Cash forex is not regulated by the CFTC and it has been called the �wild west� of trading.

Cash forex is also the wild west when it comes to taxes and reporting trading gains and losses.

There should be no 1099 reporting for cash forex, so you are your own sheriff when it comes to �rounding up� the gain and loss numbers and paying your taxes (with the nuances of IRC 988).

A person visited our booth at the Online Trading Expo in NYC and ask if cash forex was taxable at all? She heard that many cash forex traders claimed they don�t pay any taxes on their gains. We told her the IRS sheriff will catch up with them soon and throw the book at them for tax avoidance.

Remember, Form 1099 rules are minimum reporting guidelines set forth by the IRS. New products are being created all the time and it takes years for the IRS to set the guidelines for how each product is reported on Form 1099s, if at all. Brokerage firms tussle with the IRS each year on what they must report; as it causes great stress and cost on their accounting systems.

Many new and smaller cash forex brokerage firms have ramped up quickly to tap into the explosion of interest in cash forex � especially after the securities markets went into a bear spin a few years ago.

Many of these firms are not strong on reporting, systems or tax compliance, so you may be on your own when tax time comes.

Before you open a cash forex account, ask your brokerage firm what kind of reporting and support they offer you.

[B]Bottom line[/B]

Currency trading is a hot commodity in the market place, but not all currency contracts are taxed like commodities. Cash forex is subject to IRC section 988 rules and if you�re a trader, you can elect out of IRC 988, to be taxed like commodities � with beneficial 60/40 treatment. Before you start trading cash forex, find out if you brokerage firm will help you with trade accounting. If not, you may have a huge accounting headache on your hands come tax time. When it comes to currency trading, it�s wise to learn all the tax rules and consult with a trader tax expert.

I agree that trading currency is a hot market and I wouldn’t wonder that they
are really taxed. :slight_smile:

I’m bumping this because it’s a most-know for me, and I’m surprised that more people haven’t asked this question. I’ve read the previous posts, but I wonder if anything has chagned.

Has anybody recently gone through filing taxes with a forex gain or loss?

I’d appreciate any help.

The best information I have seen thus far has been from Robert Green which was mentioned in one of the earlier posts dated 2006. The website has info specifically on spot forex trading as the previous post seems to list info about currency futures.

Hey Billy,

Taxlaws are always changing, and i am 99.99999% sure that something would have changed since 2006. I live in Australia and profit from forex trading is classed as income tax, but i think if your profits from your trading are not your main source of income, then 250k is tax free! The best thing to do is go to a good accountant.

Boyfx;)

Hey Boyfx,

Thanks for the heads up. I guess you’re right. Get the info from someone whose job depends (for the most part) on being in the know. Thanks!

I live in Australia as well and I seriouly doubt that 250k (profit per year?) would be considered “a hobby” by the tax authorities.

Very true!

No probs Billy;)

[QUOTE=trustFX;131811]I live in Australia as well and I seriouly doubt that 250k (profit per year?) would be considered “a hobby” by the tax authorities.

Hey TrustFx,

I just had a quick search on the net to see if i could find where i read it, but no luck. So it was basicly something i remember reading, and your right the Gov n Tax authories are not going to just let you keep 250k tax free when they can have a slice of it. I’m going to go to my accountant and get an update on the tax laws for today, they always bloody change the rules, but when one loop hole closes, another one opens.

Boyfx;)

Cool. Feel free to post an update if you don’t mind. I am interested on the tax issue as well.

Thanks.

Yeah for sure, i’ll try get around to it some time this week. Tax, they couldnt make it easy to understand, you go to the ATO website and it’s like your reading another fluckin language.

Boyfx;)

I am just starting. Does anybody know if there is a grace level in trading? Like anything bellow 1k USD in a year being negligible?

Doubt it, it would probably be still classed as income on top of what you earn elsewhere. In Australia we get the first 6-7k tax free. It starts to get more complex though with capital gains,trading as a sole trader or under a company etc… Might be different in the U.S.

dan, in Australia there is no capital gains tax on trading, as you never own the underlying product.

The ATO does classify it as an income stream though, and if it is your second then you are taxed at the top marginal rate

Like they mentioned, depends where you are. Canada it’s essentially capital gain/loss (50% taxed at marginal rate).

Thanks Cyco, figured it was something like that.

Surely the right answer is that there is no right answer…it all depends on what country you live in. Different countries have different laws relating to Capital Gains etc.

Yes, me too i think it depends on the country where you are.

Keep up with how much of your seed money from your already taxed assets you put into forex, I know im on my own come tax time but that’s ok, i treat the account like a rolling balance if i ever do make enough to worry about taxes, as long as its in the account its invested, when I will pay taxes is when it comes out.

Hello, what if for example i had $10,000 in my account. I then made periodical withdrawals that summed up to $800 after the year ends. However, my account lost $2,000 or more from that year. So do I still need to pay taxes for that?