Forex and taxes

Could someone who has filed taxes with forex profit/loss please explain how your taxes are done. I’ve read a few online articles and am a bit confused.

Also…do brokers send a profit/loss statement at the end of the year?

Oanda didn’t send me a profit/loss statement, but they do have that information on their trading platform. I just got my numbers from it at the end of the year.

Last year was the first year I had to report forex earnings, and I did it on IRS form 6781.

We still got our tax refund (from my wife’s job) and and no IRS agents have showed up to arrest me yet, so I’m assuming I did it right. :slight_smile:

Do you report the amount you withdrew or the amount of your account balance?

I report the actual amount that I earned during the year, whether I withdraw it or not.

Went to school to be an accountant so I have some background in taxes, not much mind you, I chose to persue more the financial statement avenue.

How you claim your forex income (loss) depends partially on how long you held the position. If you only hold your positions for less than 1 Year (most do) then they are considered short term capital gains and are taxable at your regular taxable rate. The advantage here is that Short term capital gains are fully netable against short term capital losses. i.e. I made $6000 in positive trades, but lost $3000, I am only taxed for the $3000 gain.

If you hold a position open for more than 1 year then it is considered a long term capital gain and is taxed at a lower rate (if I recall it is 15%).

As far as the amount you have to claim its the amount your account has increased over the year. Open positions at year end are not included. This is based on the notion of (in tax lingo) Constructively Received. For example, at the beginning of the year your margin account balance was $3000. At the end of the year you have short term capital gains of $5000 and an open position of $1000. Only the $5000 of capital gains is taxable, not the $3000 you started with (this should have been taxed at some time in the past) nor the $1000 open position because you have not received it to your margin account.

There are other possible tax structures that are implementable to provide you with additional tax benefits. For example Incorporating which provides some legal protection if properly maintained. Then by holding shares of stock in the corporation (which pays dividends) the dividends are taxable at the 15% rate, but the income of the corporation becomes taxable (double tax). This really only works depending upon the Corps. Income and yours to get the lowest possible marginal tax rate.

Also certain expenses are deductable as business expenses. That new PC you bought with the 32" LCD (if used exclusively for trading) is fully deductable, home office space etc.

Sorry if this isnt all particularly clear. Im not a tax guru. I just wanted to provide some clarification to some of the questions. Needless to say once your makin the big bucks a good tax accountant can be your best friend.

Eracid, thanks for the info.

I have some background in taxes also and understand everything u mentioned. My question revolves more around the 2 major methods of taxing for forex. The 60/40 method of section 1256 of the tax code or section 988 regarding foreign currency transactions. Both of them have some ruling with the IRS regarding forex, but one can be opted for the other if requested.

I did ask one tax person and they couldn’t give me an answer. My guess is they don’t see any forex income with the clients they work with