I was curious how filiing taxes work. Suppose you are a U.S. customer, but are using a non U.S. broker. Do you have to report your profits? whats the consequences if you dont?
If you’re a U.S. citizen, or legal U.S. resident, you are required to report, and pay taxes on, your worldwide income. This includes income from forex trading (or any other type of trading or investment) carried out through accounts in the U.S., or through accounts outside the U.S. Failure to report all of your various sources of income can land you in trouble with the Internal Revenue Stasi (the IRS), if you are caught.
Furthermore, the IRS requires the holders of foreign financial accounts (of any type, including forex accounts) to report the details of those accounts, if the total assets of all such accounts equals $10,000 or more, regardless of profits or losses in those accounts. This reporting is done on a form called FBAR (which originally stood for Foreign Bank Account Report).
In other words, you could have a foreign bank account containing a balance equal to $9,900 and a forex account with an offshore broker containing $100, and you would be required to report all the details of both accounts on the FBAR form, and file that form with your tax return. Failure to do so would land you in trouble with the aforementioned Internal Revenue Stasi.
If you earned interest in your bank account, or earned profits in your forex account, you would be required to report those amounts as income.
Note that the tax treatment of forex profits is not as straightforward as the tax treatment of ordinary capital gains. For more on that issue, see this article — Forex Taxation Basics
Why you are so curious about taxes. Taxes are a wonderful thing if you pay taxes then it will help our national financial growth and there are so many benefits for us if we pay taxes.
[QUOTE=“nelson10;551044”]Why you are so curious about taxes. Taxes are a wonderful thing if you pay taxes then it will help our national financial growth and there are so many benefits for us if we pay taxes.[/QUOTE]
So why don’t you pay more?
Thanks for that explanation Clint. I read up the details on Investopedia, but I need more clarification specific to my situation.
The main puzzle is choosing between IRC 988 and IRC 1256 - which is more beneficial? I will start swing trading probably mid January 2014. Starting equity would be around $5k. In a year, say I grow the account to $15k. I will be trading common currency pairs i.e. EUR/USD, etc. with a broker like, say, MT4. What kind of trading is this, spot or futures? What could you suggest to do here, and when do you file taxes? If you can explain the scenario with some alternative examples too, that would be great.
Thanks!
You’re asking for tax-accounting advice from a tax non-professional. I’m not legally qualified to give that kind of advice. And you should be very wary of any such advice offered to you by anonymous persons on the internet.
You are probably agonizing unnecessarily over the 988/1256 decision. Use your best judgment at this point. Whatever decision you make initially can be changed in the future (subject to IRS rules), if you decide later that a change is warranted. And you will be in a much better position to make that choice after you have some forex trading results in the books.
If you feel that you need more specific tax advice at this stage, you will have to consult a professional tax advisor. And, of course, you will have to pay his/her fee — probably several hundred dollars, to get the answer you are looking for.
One caveat: a lot of otherwise-competent tax advisors don’t know the complexities of forex tax law any better than you do. If you need to go the tax-advisor route, choose an advisor who specializes in tax-law for forex traders.
This is spot forex trading. It is more fully described as off-exchange retail spot forex trading. It is a regulated trading activity, but (unlike currency futures trading), it is not conducted on an exchange (hence, the off-exchange designation).
Regarding suggestions and/or examples, please see my answer to your first question, above.
As for when to file your tax return, initially it’s likely that nothing will change from your current situation, because you are a beginner, for whom forex profits (or losses) will be a sideline.
If you have a regular job, for which you are paid wages (from which taxes are withheld by your employer), then you are required to file federal and state income tax returns by April 15 of each year. Income from sources other than your wages (interest, dividends, rental income, capital gains, etc.) must be reported in the same filing. As you generate forex trading profits (or losses), these will have to be reported on your regular tax returns, as well.
Later on, depending on your success in forex trading, and depending on whether you make a business of this activity, your filing status will change.
But, first things first. Right now, concentrate on learning how to trade profitably and consistently, so that when the calendar year is over, you have [I]some actual profits[/I] on which to pay taxes.