The forex tax code can be confusing at first. 40 tax treatment which is lower compared to its counterpart. By default, all forex contracts are subject to the ordinary gain or loss treatment. Section 1256 is defined by the IRS as any regulated futures contract, foreign currency contract or non-equity option, including debt options, commodity futures options and broad-based stock index options. This is the ordinary capital gains tax. In this Section 988, the gains and losses from forex are considered as interest revenue or expense. Because of this, capital gains are also taxed as such.
However, the IRS also made some provisions that will allow daily rate changes to be considered part of the trader’s assets or a part of the business. As a result, you can opt-out of Section 988 and then tax your capital gains using Section 1256. The IRS does not really require a trader to file anything in order to opt out. Many forex traders wait for about a year before opting out of this section. They are just observing how much profit they can make from forex trading. 4 million in any combination of tax years you may be able file form 8886.
Filing the tax itself isn’t hard. A US-based forex trader just needs to get a 1099 form from his broker at the end of each year. If the broker is located in another country, the forex trader should acquire the forms and any related documentations from his accounts. Getting professional tax advice is recommended as well. As you can see, there is nothing difficult about paying for forex profits at this point. However, as this trading becomes more popular, the IRS is bound to come up with more measures that will regulate the trade.
But if there’s one piece of advice you should take from this, it’s to always pay your taxes. Online Forex Trading does not promote any of these forums or websites. Disclaimer – The information provided is for educational purposes. Would you like to be contacted to receive more information about opening a trading account? Choose the brokers you would like more information on.