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Yeah, Forex is taxed too. Pretty disappointing right? Well, what can you do? It’s pretty much a source of income and the law dictates that part of that source should go to the national treasury. It simply can’t be avoided. But unlike regular income tax, the taxes on Forex (a.k.a. capital gain taxes) are a bit different, at least in terms of how they’re calculated.
"Nothing is certain except death and taxes." - Benjamin Franklin
In this guide, we will cover every major tax system for Forex trading globally and will explain how to calculate applicable taxes on your trades and how to pay them.
Forex trading taxes are region-specific and could also depend on your trading style (whether it is a side gig or full-time job) or the number of trades you make (frequency and volume).
When you are trading Forex, one of the most important things you should be focused on is taxes. Depending on your location, you will be taxed differently. For example, in the United States, Forex profits are taxed as capital gains.
Depending on the money that you make from trading, the tax ranges from 15 to 37 percent. On the other hand, there are some countries that tax Forex trading as regular income tax.
In Forex trading, only the profits that you make are taxable, you should not worry about the losses. Let's say that in your location, the tax on Forex trading is 20%. As a result of your trade, you have made $4,000 in profit. The tax that you will have to pay will be $4000 x 0.2, which comes to $800. After paying $800 in taxes, you will be left with a $3,200 net profit.
Before we discuss how to pay taxes while trading Forex, let’s talk about the two most common taxes that traders should know about; income tax and capital gains tax.
The definition of income tax is very simple. It is a tax that applies to the income and profits earned by individuals during the calendar year. It is required by law for taxpayers to file an income tax return annually.
This way, their tax obligations can be determined and met. Income taxes act as a source of revenue for governments and are used to fund public services, pay off government debts, and provide goods and services to their citizens.
Income tax can include any type of income you earn, be it from your salary, wages, or investments. On the other hand, there are certain investments that can be exempt from income taxes.
In the United States, the Internal Revenue Service (IRS) is responsible for collecting taxes and enforcing tax laws. The agency collects taxes on all forms of income. Whether it is your salary, commissions, investments, or trade, the IRS is there to take their pound of flesh.
Taxes on currency trading are different in every part of the world. For example, in the USA the maximum tax for currency trading is roughly 37%, in China it’s 20%, while in Switzerland it is beautiful 0%.
These numbers might not always be the case. For example, in the USA, the taxes that you might have to pay depends on the profits that you have made. For example, the effective tax rate for income up to $40,000 was 12% in the US.
Forex taxes usually involves paying capital gains tax. You should think about capital gains tax when you sell a certain security at a higher price than you paid for it. While there are many countries that have capital gains taxes, others do not. For example, in Russia, Forex is taxed at the same rate as the personal income tax.
While calculating capital gains tax, you should start by understanding what the taxable income is from your trades. In Forex, it is the payout you have earned after closing each winning position.
For example, let's say that you were trading a certain minor currency pair and you gained profits of $15,000, while your initial investment was $10,000. This means that your payout for this position was $5,000.
If the capital gains tax in your country is 10%, the tax on your Forex trade, in this case, would be $500. But, you do not have to calculate the taxes that you owe after closing every position.
At the end of the calendar year, the brokerage will issue a document, which shows the total amount of gains and losses that you have made. You can use this document to calculate the capital gains tax.
You can also take notes of your payouts after each trade, to make sure that you have a general idea about where you stand regarding taxes and throughout the year.
As already mentioned, the tax on Forex trading is different in different parts of the world. Generally, most countries charge capital gains taxes on Forex trading, but there are other countries that do not have anything similar to the capital gains tax and just use regular income tax for Forex taxation.
The great news is that some countries don’t charge taxes on Forex trading at all. Understanding how to pay taxes on Forex is very important for every trader. Avoiding paying taxes can lead to many problems that you don’t want to deal with.
Below, we will discuss how Forex taxes work in different parts of the world. So, follow our guide and find out how much you should be paying in taxes for your FX trading.
Traders in the US are required to pay taxes for the profits that they make. Paying taxes in the United States is a very complex activity that can be a bit confusing for new traders.
As we have already noted, the main agency that controls tax payments in the US is the IRS. This organization is responsible for receiving taxes and controlling the taxation of any income.
In the United States, there is a different taxation code for short-term and long-term capital gains. The taxation on long-term capital gains in the country ranges from 0% to 20%, and it depends on your annual earnings. On the other hand, short-term capital gains tax ranges from 0% to 37%.
In the United States, there is a certain period of time during the year when everyone is paying taxes. This is called tax season, and it is usually between January 1st and April 15th. However, sometimes, it can last up until the middle of May. As a Forex trader, you will also be required to prepare your financial statements and reports at this time of year and submit your tax returns.
If you fail to file Forex taxes in the US by the deadline, you will be subject to penalties. So, start preparing early on.
While trading Forex, you should know that there are two different sections for this market, section 1256, and section 988. For Forex options and futures contracts, in most cases, section 1256 is used. This section envisages a 60/40 tax.
Here, 60 percent of gains or losses are counted as long-term capital gains or losses, and the remaining 40 percent is counted as short-term. So, let's say that your total payout in the market was $10,000. This means that for $6,000 of this income your tax will be calculated as long-term capital gains, and tax for $4,000 as short-term gains.
Let’s assume that the tax for long-term gains is 15 percent, and the tax for short-term gains is 20 percent. This means that your total tax will be $6000 x 0.15 + $4000 x 0.2, which equals $1,700. This means that you will have to pay a total of $1,700 in taxes.
When trading Forex, features, or options, the maximum tax under this section is 20% on 60 percent of the gains and 37% on the other 40 percent of the profits.
In most cases, profitable traders prefer to use section 1256 for Forex trading taxes in the US. There are many reasons for this, one of the main being the fact that it offers greater tax breaks to traders.
Although this tax option is used by many traders, it does come with several downsides. One of the biggest disadvantages is that the losses that can be claimed under this section are a maximum of $3,000 per annum. This means that even if you lost as much as $15,000 during the calendar year, you will only be able to reduce the taxable income by $3,000 and no more.
When it comes to paying taxes on Forex, most spot traders are taxed according to section 988 of the internal revenue code. This section was created for the Forex transactions that are settled within two days.
Those who are taxed according to this section are sometimes referred to as 988 traders. There are numerous advantages this type of taxing brings to traders.
For example, if you suffer from losses in terms of year-end trading, you will be able to count all of your losses as ordinary losses. In terms of the previously discussed section, section 1256, you would only be able to count the first $3,000 that you lost as trading losses.
In most cases, section 988 is used by losing traders. Because there is no capital-loss limitation, it allows traders to have full standard loss treatment against any income. Thanks to this, you can take advantage of trading losses to decrease your taxable income.
When traders file for section 988, the profits made while trading will be taxed as ordinary income. In many cases, if you file under this section, the profits will be taxed with other sources of your income. So, if you are a single filer with about $48,000 taxable income, you will be paying 22% in taxes, which is about $10,560.
Now that we have covered how Forex traders are taxed in the US, we can move on to other parts of the world. The highest capital gains tax in Europe can be found in Denmark, where the rate is set at 42 percent. Finland and Ireland are second and third in terms of the highest taxes, with 34 and 33 percent respectively.
Although there are numerous regulations aimed at making the financial markets similar in European countries, the taxes charged on Forex trading are different. In fact, many of the countries in Europe do not have capital gains taxes at all. For example, Belgium, Luxembourg, Slovakia, and Slovenia do not have capital gains taxes. The same is true for Switzerland and Turkey.
While countries like the Czech Republic, Greece, and Hungary do have capital gains tax, it is only 15 percent. On average, taxes for Forex traders around Europe sits at roughly 19.5%.
In Belgium, there are no capital gains taxes applied to traders. However, capital gains can still be taxed in the country. If you are a professional trader and your income is regarded as professional income, you will have to pay capital gains in Belgium as well.
France also has a very interesting stance on Forex taxes. Here, a flat 30 percent tax is applied on capital gains, but there is a 4 percent addition for high-income traders.
There are three types of taxes in the UK that might be applicable to Forex traders. They are income, corporation, and capital gains tax. If you are a trader who does not have any consistent method or system of trading, and you are using Forex as gambling, you will not be taxed as whatever income you make will be considered secondary.
If you treat Forex trading as a business, and it is the main source of income for you, you will be taxed based on your income, or capital gains. In most cases, Forex trading income is charged as capital gains tax.
At the end of the day, whether you will have to pay taxes depends on the classification of HM Revenue & Customs (HMRC).
There are three classifications of traders at the agency:
As already stated, speculative traders are not subject to pay taxes, self-employed traders have to pay taxes and are treated as other self-employed individuals in the country, and private investors' profits and losses are subject to a capital gains tax.
But, how much tax do you pay on Forex profits in the UK? The general answer to this question is that the median tax rate for Forex trading in the country is around 20 percent. So, if you made $10,000 in profits, you can expect to be paying more or less $2.000 in taxes.
Being one of the countries that recognize Forex trading as a legitimate income-generating activity, profits made while trading Forex are subject to taxation. Not only are the residents of the country required to pay these taxes, but foreigners trading with Australian Forex brokers are also expected to pay taxes for their Forex trading.
Traders who have made profits during the tax assessment year must file for taxes and pay them.
The same rules are applied to both retail and professional traders when paying taxes. The tax rules in Forex are applied to the losses and gains of trading. Because of this, the profits made in Forex can be considered capital gains taxes.
But, for capital gains tax to be applied, trades must be held for more than a year at least.
Now for the big question: Exactly how much tax do you pay on Forex trading in Australia? Out of the profits that you make in Australia, only 60 percent can be considered long-term capital gains/losses. In general, the total tax rate in Australia for Forex trading is 23%.
You can calculate your taxes for Forex in Australia as follows: 60% will be taxed as long-term capital gains with a maximum rate of 15%. 40% will be taxed as short-term capital gains and is multiplied by the maximum income tax rate. So just add all of that together and you will know exactly how much you need to hand over to the Australian Taxation Office.
Every country around the world has a different approach when it comes to taxing profits made in Forex trading. For example, in Canada, traders pay taxes on Forex based on a rate of 50% of your marginal tax rate.
As for the professional traders who make hundreds of thousands of dollars from Forex trading, they are required to pay capital gains tax for the total profits made in Forex trading.
On the other hand, in India, foreign exchange transactions of up to Rs 7,000,000 in a financial year are free from paying any taxes. Any transactions that are above this number are taxed at a rate of 5 percent.
In South Africa, Forex trading is taxable as well. Any profits made by traders in South Africa will be taxed just like regular income. This means that taxes on Forex trading in the country must be filed as Personal Income Tax. The rate for this tax in the country can range from 18 to 40 percent and is dependent on the profits that traders have made.
Paying taxes can be a huge headache for traders. Because of this, there are many people looking for places where they can start trading and not pay any taxes. Worrying about how and when to file taxes for your Forex trading can be quite annoying for traders. Luckily, there are a few countries where you can trade Forex without having to pay any taxes at all.
The great news is that there are numerous countries where you can trade Forex currency pairs without having to pay any taxes! This includes countries from Europe as well as from many other parts of the world.
Among the countries where you won't be paying taxes for Forex trading are Switzerland, The Bahamas, the United Arab Emirates, the British Virgin Islands, and a few more lovely places.
The Bahamas in general is considered to be one of the best countries for Forex trading because it is tax-free for most trading activities. Residents of the country are not even required to pay income taxes as the country receives most of its funds from tourism and offshore industry.
The country is also very easy to move to. With a yearly residence permit that costs just $1,000 to get and renew. Many traders and investors, as well as business operators, have moved to the country over the years because of its low Forex tax rates.
There are also several European countries where Forex traders do not have to pay any taxes. Among the European countries where you won't be required to pay any taxes are Belgium, Luxembourg, Slovakia, and so on.
While discussing how to pay tax as a Forex trader, it is important to know who you should file these taxes. While this procedure is a bit different in some countries, it is generally the same.
We will discuss how the process works in the USA. The first thing to do when trading Forex in the US is to decide under which section you should file your taxes.
This might be a bit hard to decide, but, if you focus on your personal trading needs and style, the decision might be easier to make. As we mentioned earlier, there are two main choices for Forex traders: Sections1256 and 988.
The decision on which one to use must be made on the first day of the calendar year. Section 988 is considered to be simpler when compared to 1256. In the case of section 988, the tax rate remains the same. On the other hand, when dealing with section 1256 it gets a bit more complex, but it does offer 12 percent more savings for traders. So you need to consider and chose wisely.
You can also use a Forex tax calculator before you file the taxes, as it can help you see where you are at prior to officially filing your taxes.
Prior to filing taxes, you have a year of trading. In some cases, traders simply do their job and make profits. They wait for the end of the calendar year to receive reports from the brokers they are using and pay taxes accordingly.
But, this strategy might not always be useful. While learning how to pay tax on Forex income, it can be very helpful to try and keep track of where you are at in terms of profits, so that you can be ready to pay the taxes.
By keeping track of your trades, you will have half of the job done.
A very important step towards successfully filing your tax reports is to talk to your accountant first. This is especially important at the beginning of the calendar year when you are choosing which section is a better fit for you; 988 or 1256.
By talking to your accountant, you will be able to better understand how to pay taxes on your Forex trading without making any mistakes. It can help you better prepare for the tax season and not waste a lot of time on calculating, it can also save you from running the risk of miscalculating and needing to pay penalties.
Avoiding paying Forex trading taxes can have devastating legal consequences. There are different penalties that apply to people who do not file their tax returns and do not pay them.
If you do not file for taxes, you will get a special penalty, called a “failure to file”. This penalty will see an additional 5 percent added to the outstanding amount for each month that the tax payment is late. In addition, if you do not file for more than 60 days after the deadline, you will be required to pay additional penalties.
On the other hand, if you file but don't pay, the IRS will charge you 0.5 percent of your unpaid taxes for each month that you are late. This penalty can go up to 25 percent of the total amount. In addition, interest can also be applied to your outstanding tax bill.
So, when trying to understand how to avoid paying tax when trading Forex, the only legal way out is to trade in countries where there are no Forex trading taxes. Otherwise, the consequences can be quite severe.
Yes, traders pay taxes on Forex trading. Depending on your location, you will have to pay different amounts of taxes. For example, Forex trading tax in the USA can be as high as 37% depending on the profits that you make.
While trading Forex and calculating taxes, you should not worry about the losses. You should only include profitable trades in your calculations. Understanding how Forex is taxed in your location is very important as it can influence your final profits in the trading market.
While you are generally required to pay taxes, there are some countries around the world where you won’t be needing to do so. This includes countries like Switzerland, Turkey, and many others.
Yes, in most cases, you will be able to write off your Forex losses while filing your taxes returns. However, there are cases when you will have some limitations. For example, when learning how Forex traders pay tax, you will notice that most traders use sections 988 and 1256.
Those who file under section 988 do not have any limitations for writing off losses. However, those using section 1256 to file their taxes have a limit of writing off a maximum of $3,000 in losses.
In the USA, there are two main ways of filing taxes. Some traders use either IRC section 988 or IRC section 1256. Forex options and futures traders mostly use section 1256. This section counts 60 percent of the gains or losses as long-term capital gains or losses and the remaining 40 percent as short-term.
This is considered to be a bit more complex when compared to section 988, which is a lot simpler and is mostly used by traders who are new to the market. The best thing about filing under section 988 is that traders can write off all of their losses.
On the other hand, traders using section 1256 are only able to write off losses of up to but not exceeding $3,000. You can choose how to file taxes on Forex during the first few days of the calendar year.
Depending on your location, you can be either required to report Forex income or not. While most of the countries tax Forex trading profits, there are others that do not. If you are from a country where there is no tax on Forex trading, you are not required to report Forex income.