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Forex taxes policies
The excitement of first successful deal and the thrill of first withdrawal of its earning is something no trader can ever forget. But they get busy in trading more and looking for all other avenues to ensured trades, they tend to forget they owe something to the country too. Yes, Forex taxes, which is what often traders miss out from their plan of actions. In US, it is mandatory for all the traders to pay for the Forex deals. Foreign residents presently in US but neither are residents nor citizens may not bother about Forex taxes.
Forex Taxes Policies
If you are a currency trader engaged in Forex spot market with cash, you have the option to be taxed under regular commodities as per Internal Revenue Code or IRC Section 1256. Another option of taxation is IRC Section 988. According to this Section, you will be taxed under special rules of Treatment of Certain Foreign Currency Transactions. If you don't select either of these Forex taxes policies, Section 988 is applied to you by default.
Advantage of Section 1256
When it comes to the payment of Forex taxes, Forex traders get an extra edge over the stock traders. When they declare the gains made to the IRS on their Form 6781 which is for Gains and Losses from Section 1256 Contracts and Straddles, they are allowed to split it on Schedule D i.e. on a 60% and 40%. This implies that the 60% of these gains would be taxed at the rate of long term capital gains which is currently 15%. Rest 40% of the capital gains would be taxed under the usual rate. This rate of short term capital gains depends on the taxation slab in which the trader has been placed. It can be as high as 35%.
Section 988-Opt out or Not
There are categories of companies that fall under Forex taxes policy of Section 988, as for example, the one that make profit from the ups and downs of the exchange rates. As a result, all the gains and losses that they make are regarded as the interest income. Thus the Schedule D of 60-44 split is not applicable for such business. Their income from the fluctuations of exchange rate makes them subjected to Section 988 but at the same time, since it can be considered as asset of the traders as well, thus the option of rejection of this Section is also provided. Definitely, Section 1256 is the favorable of both the policies of Forex taxes.
To Pay Forex Taxes
When the time comes to pay the Forex taxes, the traders need to fill up the 1099 forms that they would receive from their America-based broker. You can seek professional help of any tax consultant. Avoid the temptations of Section 1256 if you don't qualify because remember, financial market is developing every day and IRS regulations will eventually strengthen their grip. A foolish step taken now to escape a marginal amount of Forex taxes can result in undesired aftermath.