I talked with my fellow from US who wants to start trading with my broker, but unfortunately it doesn’t offer services to US citizens. Is it possible to find a loophole in this situation. And what about IRS pursuing? (taxes)
Need advice ASAP
The rejection your U.S. friend got from an offshore broker can be traced back to the CFTC (the U.S. regulator of commodity futures and retail forex). Some of us have spent the past 4 years discovering ways to get around the roadblocks placed in our path by the CFTC.
Over the past 4 years, we have generated a mammoth thread, which you might not want to read in its entirety — and we have generated an [B]Offshore Broker List,[/B] which you and your friend definitely [I]should[/I] read. Our List divides the brokers we have vetted (currently 141 of them) into two groups — those brokers who will accept U.S. clients, and those who won’t.
Have a look — 301 Moved Permanently
There are excellent, financially sound, well-regulated offshore brokers who welcome U.S. clients. But, in this arena in particular, DUE DILIGENCE on the part of the individual trader is more important than ever. In our Offshore Broker thread, we try to help with the due diligence.
As regards the IRS and taxes, of course the IRS wants their cut of any profits a U.S. person earns in an offshore forex account, offshore bank account, offshore business, etc. U.S. law provides for the taxation of U.S. persons [B]on all of their worldwide income,[/B] regardless of source. (A U.S. person is defined as a U.S. citizen, or a legal U.S. resident who is not a citizen.)
In addition to the requirement to report taxable income (profits) from forex trading through an offshore broker, there is another IRS requirement for those persons who hold medium or large account balances offshore. If your friend holds funds totaling $10,000 or more in one or more offshore accounts of any type, then the IRS requires the filing of a special report (separate from a regular tax filing), detailing each and every one of those accounts, including the balances held in them. The form is called FBAR (which originally stood for Foreign Bank Account Report), and if it applies to your friend’s situation, then he can find the form on the IRS website. Finally, for U.S. persons holding $50,000 or more in offshore accounts, there are additional special reporting requirements. Again, see the IRS website, if this applies.
Many people have asked whether it’s possible to get around all this crap by obtaining dual citizenship, or by setting up a foreign corporation, etc. In some situations, apparently, there are viable options for escaping the clutches of the IRS. But, for most of us, these options are prohibitively expensive. And I would not even consider such an option without the advice and consent of a good tax attorney who specializes in these matters.
The CFTC wants to prevent every American from trading retail forex offshore. They have been partially successful in this effort. Through mutual agreements with the regulatory agencies in many other countries, CFTC regulations have essentially been exported to those countries. These agreements are called Memoranda of Understanding (MOU’s), and although they are ostensibly for the purpose of harmonizing regulations between friendly nations, their primary effect is to extend the reach of the CFTC around the world. I’ve said often that the CFTC wants to be the World Forex Police. If that’s an exaggeration, it’s not a large one.
The CFTC has prosecuted foreign brokers who are not registered with the CFTC and are not in compliance with CFTC regulations, [I]if those brokers solicited U.S. clients — either directly, or simply by maintaining a U.S. website.[/I]
And the CFTC has prosecuted foreign brokers who have U.S. clients, but have no business activity or “presence” whatsoever in the U.S., [I]if those brokers are domiciled in countries which have signed an MOU with the CFTC.[/I]
This is a key point: In cases where the CFTC has prosecuted offshore forex brokers for dealing with U.S. clients, the U.S. clients involved HAVE NOT faced any sort of prosecution. The CFTC has authority over brokers, but not over their clients.
Nevertheless, if your friend establishes a client relationship with an offshore broker who is later forced by the CFTC to dump his U.S. clients, your friend will end up scrambling to unwind any open positions he may have with that broker, and move his funds to some other broker. Altogether, a major pain in the butt, and one to be avoided, if possible.
Again, DUE DILIGENCE is essential in the selection of an offshore broker.
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