Currency traders face complexities and nuances come tax time. There are two distinct types of currency trading and each has profound differences in tax and accounting rules. Many currency traders transact in both. Most currency traders seek to be treated like commodities and futures traders, in that their trading gains and losses are treated as section contracts.

Both business traders and investors report section contracts as capital gains and losses on Form Gains and Losses from Section Contracts and Straddles. Additionally, since RFCs are marked-to-market at the close of each day and year , in accordance with IRC section , the economic and taxable gain or loss are the same. IRC specifically mentions that RFCs and other mark-to-market instruments are exempt transactions.

When a currency trader uses the interbank market to transact in Foreign Currency Contracts and Other Forward Contracts, they are exposed to foreign exchange rate fluctuations, similar to a manufacturer stated above.

However, the currency trader looks upon their currency positions as "capital assets" in the normal course of their trading activity business or investment. Most currency traders will want to make this election for the tax-beneficial treatment of section lower tax rates on gains. For more details see http: Conversely, if you have cash forex trading losses, you may prefer ordinary loss treatment over Section capital loss treatment, so you may not want to elect out of IRC Note that IRC losses may be carried back up to three tax years, but only against IRC gains in the prior three tax years.

Ordinary losses may offset any type of income. Many traders do bend the rules and after year-end if they have cash forex gains, they claim they elected out of IRC , to use the beneficial IRC treatment. Others report them on Form line 21 as ordinary income and just pay higher taxes, without knowing the difference. We expect the IRS to catch up with all cash forex traders soon, after the explosion of cash forex in the online trading market.

Currency futures traders have it easy, on two accounts. Your brokerage firm sends you and the IRS a simple Form soon after year-end, reporting one number for your Section trading gain or loss for the tax year. Your brokerage firm simply adjusts your realized gains and losses with beginning and end of year unrealized gains and losses for a combined realized and unrealized gain or loss amount.

Form s do not report cash forex transactions or single stock futures.

So these types of traders are on their own. Some brokerage firms offer online reporting, but many have unmatched trades and some say you can not rely on these reports for your tax returns.

So if you trade in anything other then Section contracts, you will probably need your own accounting solutions or software programs. Most good accounting programs are geared towards securities traders. These results are sufficient for tax authorities and reporting rates of return to investors.

Use the same formula in a worksheet for your tax return. Ending net assets at market value less beginning net assets at market value , less additions of cash, plus withdrawals of cash, equals net performance.

Then subtract non-trading items like interest income, add interest expense and other expenses and you have net trading gains or losses on cash forex. If you try to figure out your cash forex gains and losses from your monthly brokerage statements you may get very confused and lost. We have clients that have different statements for each type of currency e.

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US dollars, Japanese Yen, Swiss Francs, and Euros and it can become a nightmare scenario to try and figure it all out. My broker reported my cash forex along with my IRC contracts, is that ok? Consult with a trader tax expert who may be able to help. A person visited our booth at the Online Trading Expo in NYC and ask if cash forex was taxable at all?

We told her the IRS sheriff will catch up with them soon and throw the book at them for tax avoidance. Remember, Form rules are minimum reporting guidelines set forth by the IRS. New products are being created all the time and it takes years for the IRS to set the guidelines for how each product is reported on Form s, if at all. Brokerage firms tussle with the IRS each year on what they must report; as it causes great stress and cost on their accounting systems.

Many of these firms are not strong on reporting, systems or tax compliance, so you may be on your own when tax time comes. Before you open a cash forex account, ask your brokerage firm what kind of reporting and support they offer you. Currency trading is a hot commodity in the market place, but not all currency contracts are taxed like commodities. Before you start trading cash forex, find out if you brokerage firm will help you with trade accounting.

If not, you may have a huge accounting headache on your hands come tax time. I agree that trading currency is a hot market and I wouldn't wonder that they are really taxed. I'm bumping this because it's a most-know for me, and I'm surprised that more people haven't asked this question.

I've read the previous posts, but I wonder if anything has chagned. The best information I have seen thus far has been from Robert Green which was mentioned in one of the earlier posts dated The website has info specifically on spot forex trading as the previous post seems to list info about currency futures. Taxlaws are always changing, and i am I live in Australia and profit from forex trading is classed as income tax, but i think if your profits from your trading are not your main source of income, then k is tax free!

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The best thing to do is go to a good accountant. Thanks for the heads up. I guess you're right. Get the info from someone whose job depends for the most part on being in the know. I live in Australia I live in Australia as well and I seriouly doubt that k profit per year? I just had a quick search on the net to see if i could find where i read it, but no luck.

So it was basicly something i remember reading, and your right the Gov n Tax authories are not going to just let you keep k tax free when they can have a slice of it. I'm going to go to my accountant and get an update on the tax laws for today, they always bloody change the rules, but when one loop hole closes, another one opens.

I'm going to go to my accountant and get an update on the tax laws for today Yeah for sure, i'll try get around to it some time this week. Tax, they couldnt make it easy to understand, you go to the ATO website and it's like your reading another fluckin language. I am just starting. Does anybody know if there is a grace level in trading? Like anything bellow 1k USD in a year being negligible? Doubt it, it would probably be still classed as income on top of what you earn elsewhere.

In Australia we get the first k tax free. It starts to get more complex though with capital gains,trading as a sole trader or under a company etc..

Might be different in the U. The ATO does classify it as an income stream though, and if it is your second then you are taxed at the top marginal rate. Like they mentioned, depends where you are. Surely the right answer is that there is no right answer Different countries have different laws relating to Capital Gains etc.

How are taxes applied when trading the foreign exchange? Is it the same as the trading stocks? Green, from the Futures magazine in April issue.

Feel free to post an update if you don't mind. I am interested on the tax issue as well. How do taxes work for forex trading? Green, CPA When it comes to trading in currencies, special tax rules apply. Currency trading is like commodity trading in general Most currency traders seek to be treated like commodities and futures traders, in that their trading gains and losses are treated as section contracts.

RFCs based on currencies are just like any other RFC on an organized exchange. Can you bend the rules? Wow, if only all traders had it so easy on accounting! Securities and cash forex traders face accounting challenges come tax time. Continuation from previous post Technically, cash forex are IRC transactions and should be segregated from IRC contracts. You should consult with a trader tax expert if this case applies to you. Cash forex is also the wild west when it comes to taxes and reporting trading gains and losses.

Bottom line Currency trading is a hot commodity in the market place, but not all currency contracts are taxed like commodities. Has anybody recently gone through filing taxes with a forex gain or loss?

I'd appreciate any help. Hey TrustFx, I just had a quick search on the net to see if i could find where i read it, but no luck.