Do forex traders pay tax on trades?

Traders must pay a tax on forex trading in most cases.

However, the type and amount of taxes to be paid depend on several factors that we will see in this article.

Do you have to pay taxes on forex trading?

Taxes on forex must be paid when trading derivatives (such as CFDs or futures), unless you reside in a country that does not tax capital gains.

In fact, in most countries around the world, the state does not tax transactions in different currencies unless the currency exceeds a certain value.

For example, if a person has a USD account at his or her bank and decides to open a second bank account in EUR, he or she will generally not have to pay any tax if he or she transfers funds from one account to the other by speculating on the EUR/USD exchange rate.

However, when trading forex, transactions take place in CFDs or futures contracts. These are derivatives, not real currencies, so different forex trading tax laws and rules apply when making money.

Generally, derivatives are treated as real assets or assets, consequently when you have a gain, this is treated as capital gains tax.

Do forex brokers pay taxes on forex traders’ behalf?

Forex traders are expected to make their own arrangements to pay their taxes, as brokers (generally) do not act as tax withholding agents.

Forex brokers might pay the forex trading tax on behalf of the trader only in specific cases, such as when they are based in the same country as the forex trader.

One example is IG Markets, which is a British forex and CFD broker with several offices around the world, including one in Italy. In fact, forex traders from Italy, can request IG Markets to pay the taxes for them, or they can contact their trusted accountant and pay the taxes themselves without the help of the broker.

How are taxes calculated in forex trading?

Forex taxation is calculated as capital gain tax in most countries around the world.

The capital gain tax is a tax on the gains the trader had during the calendar year, which must be paid the following year.

In other words, if the trader opened a forex trading account in November 2022, in 2023 he or she will have to declare how much he or she earned between November and December 2022, and pay CGT according to the current regulations.

The capital gain tax is calculated only and exclusively on the capital gains obtained. This means that if the trader started the calendar year with a capital of $1000, and at the end of the year the capital has increased to $1500, the tax will only have to be paid on the $500 gain.

Generally, the CGT is calculated as a percentage of the capital gain. In other words, if the CGT is 10%, and the trader has made a capital gain of $500, he will have to pay $50 in tax.

In some countries, on the other hand, taxes are calculated as Income tax. The main difference is that Capital Gain Tax refers only and exclusively to trading activity, while Income Tax takes into account the trader’s total income.

In other words, if a forex trader resides in a country that applies an Income Tax, the state would add the 1000 USD capital gain to his total earnings, which we imagine to be 50000 USD. So the trader will pay a tax depending on which tax bracket he falls into.

In the case of the tax brackets below (totally for illustrative purposes), the trader would fall into the 15% bracket. As a result he will have to pay to his state of residence a tax of $7650.

Are forex trading losses tax-deductible?

Forex taxes can be tax-deductible based on past years’ profits and losses.

When forex traders lose money, he may not pay taxes in the following years until the losses generated are flattened.

In other words, if the forex trader loses money for 3 years in a row with a total loss of $500, he may not pay tax until he reaches $500 of capital gain in the following years.

The number of years in which losses can be taken into account for capital gains tax depends on the trader’s state of residence, but generally do not go beyond 5 years.

Forex trading tax around the world income

Each country treats extra earnings differently, but generally they can be divided into two categories: countries that have a Capital Gain Tax, and countries that have a Personal Income Tax.

Below you can find a table showing the forex taxation of some countries in the world.

For practical examples, here are hypothetical scenarios with 4 different people but similar scenarios: i.e., an annual gain of $50000, and a capital gain of $1000.

Australia: In Australia, capital gains are considered Income Tax and taxed at progressive tax rates. For 2023, the tax rate for an annual income of $50,000 is around 32.5%. Thus, the trader will pay a total of $16575 in taxes given the total taxable income of $51,000.

US: In the US, capital gains are taxed depending on how long the underlying asset is held. If Emily holds the asset for less than one year, the capital gains will be considered ordinary income and taxed at progressive tax rates. For 2023, the tax rate for an annual income of $50,000 is around 22 percent. Thus, the trader will pay about $11220.

Canada: In Canada, 50% of capital gains are considered taxable income. Therefore, Liam will have to add $500 ($1,000 x 50%) to his annual income. The tax rate for an annual income of $50,500 is around 24%. Thus, the trader will pay about 24% of his $1,000 capital gains in taxes, or $240.

UK: In the UK, capital gains are subject to capital gains tax (Capital Gains Tax). However, there is an annual exempt amount (AEA) that allows a certain amount of capital gains to be earned without paying tax. For 2023/2024, the AEA is £12,300. Therefore, british forex traders will not have to pay any tax on his capital gains of $1,000 since they fall under the AEA.

Are there tax advantages to using specific forex trading strategies?

There are no tax advantages to using specific forex trading strategies.

In the foreign exchange market, it is not the strategy you use that matters, but your total gain at the end of the year.

So it doesn’t matter whether you use very short-term trading techniques such as scalping, or trading techniques that instead involve keeping forex positions open for weeks at a time, or if you’re trading forex futures.

All that matters for tax purposes is how effective these techniques have been in bringing you profit.

How does leverage impact the taxes I owe on forex trading profits?

Leverage does not affect paying forex taxes.

Leverage is nothing more than a tool that allows forex traders to open large-volume positions with a relatively low amount of money, and it does not affect in any way the payment of taxes.

So what you have to take into account is the profit or loss you made during the reporting period.

Do trading different forex pairs influence the amount of taxes to pay?

The currencies you trade do not affect the fees you have to pay.

What retail forex traders need to consider is only the currency of your account. In fact, if you have a USD account, for example, all the transactions you make through the trading platform will be converted to the currency of your account.

So it does not matter whether you trade forex pairs such as EUR/USD or GBP/AUD, as all forex profits and losses will be converted to USD if necessary.

How do I track my forex trading transactions for tax purposes?

To track your trading activity you can download the account statement directly from your trading platform.

In fact, forex brokers provide you with several tools to make your job easier for accountants or other experts in the field, so they can help you fill out the necessary paperwork to pay your taxes.

In the account statements there is data such as the starting and ending amount of money, what is the value of the trading positions still open, the currency of the trading account, the history of all open and closed positions, and much more.

Once you have downloaded the account statement, if you are unable to fill out the tax documents, you may want to contact an accountant so that they can help you out.