Forex Trading And Taxes – A Must Read Article About Them
Many traders will not start to think about Forex trading and taxes until they have really made some money on the Forex market. Just like with any other forms of income, traders are required to keep a record of their revenue so that they can report it to the IRS. Failing to do so could land the trader in hot water with the IRS.
Traders who live in the United States of America are legally required to pay taxes for the profit they make on the foreign exchange market. Most traders will not like having to part with their money or dealing with the IRS. Unfortunately this is a necessary evil for those that live in the United States. Traders in other parts of the world will need to check with their local government department what their tax obligations are.
In the United States Forex traders have two practical options when it comes to filing taxes. They can either choose to be taxed under the rules and regulations of regular commodities which is IRC Section 1256 contracts or they can opt to be taxed under special rules. Special rule is IRC Sections 988 - Treatment of Certain Foreign currency. Section 1256 is a good option for traders as it allows them to split their capital gains on schedule D using a 60 to 40% split. This is beneficial as 60% of the capital gains will be taxed at 15%. This is the current rate for lower capital gains. The remaining 40% will be taxed at an ordinary captial gains rate that can be as high as 35%. Section 988 treats gains and losses from Forex as interest expenses or income. As there is no 60/40 split, this type of taxation can get confusing. As traders deal with exchange rates on a daily basis, the trading activity will also fall under Section 988 provisions.
Those that are unsure of how to file taxes on the money that they have earned through Forex should consult with an investment adviser or accountant. Both of these professionals will be able to advise people on what steps they need to take in order to meet their tax obligations. Those that think they will be able to get out of paying taxes for their Forex trades should understand it is better to be safe than sorry. The IRS will not be lenient when it comes to people who are avoiding paying taxes.
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