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Tax Issues for Forex Traders (USA)

Discussion in 'Forex Articles' started by Black Knight, Oct 11, 2007.

  1. Black Knight

    Black Knight Private, 1st Class

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    Since this question comes up quite often, I thought I'd briefly cover the basics. First, let me preface by saying I am not a tax or accounting professional, and I highly suggest that you consult one prior to following this or any other tax-related advice. I happen to know one of the best, however - Robert Green - and there's a link to his site below.

    By default, speculative forex transactions are treated by the IRS as 1256 "contracts and straddles", and get the lower 60/40 treatment. What is 60/40? Normally, capital gains (investment income) are taxed at a lower rate if they are "long-term" investments (held over 1 year), and a higher rate if held under a year ("short-term capital gains"). Naturally, in Forex it is rather difficult to hold onto positions for over a year (unless you are a carry trader). Therefore your capital gains are automatically split 60/40 between the higher and lower rates.

    There is another section of IRS tax code called IRC 988, or "foreign currency transactions" . Here amounts are treated as ordinary gains or losses. One reason someone may choose this option is if they have a lot of losses (rather than gains). But... be careful. The IRS is fairly strict on making elections - you cannot cherry pick after-the-fact. They can only be done on Jan 1st or the start of your trading year, and revoked only with IRS consent.

    Usually, spot forex will fall under IRC 1256, but to be absolutely safe go ahead and make a formal election one way or another (since forex is still somewhat a "gray" area - depending on whether it is traded on a US or a foreign "exchange", and whether or not you trade it as "futures contract"). What is an "election"? It is a document you write, sign, & date which summarizes your intended accounting practices (also includes things like your fiscal year, etc.). At this time, the IRS does not require that you file a copy with them, only that you keep it on file (though this too may change).

    Declarations under IRC 1256 are reported on IRS Form 6781, where they are split 60/40 prior to being transferred to Schedule D. Declarations under IRC 988 are only reported in summary form on Line 21 of Form 1040.

    This is only a summary of the present laws (and tax laws frequently change), so I highly recommend that you visit Robert Green's very detailed site on the matter at http://www.greencompany.com/EducationCenter/GTTRecCurrency.shtml

    Good trading,

    -=Black Knight
     
  2. Administrator

    Administrator Just Administrator :-)

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    Tax

    Good post blacknight :) Filing taxes next year has now become a lot more interesting :)
     
  3. No Time

    No Time Private, 1st Class

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    Nice post

    Black Knight. Great post and thanks for the link.

    I do believe having a strong accountant who specializes in forex is ALSO a part of money management and "Locking in Profits"!!!:eek::cool:
     
  4. OzWizard

    OzWizard Corporal Punishment

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    TAX FREE Trading !! ??? Da!!!! (Yes).....

    Hey guys, this is for real...* USA guy taking profits from the E-Mini S&P now for almost 3 years...* TAX FREE! Is it a SCHEME...** yes...** is it legal - YES!!!** Easy, anyone can do it...I use a Lithuanian Bank (they are very secretative) but this has nothing to do with my strategy... any bank like Swiss, or other country (non-USA) will do.I use them to fund my account, and wire profits back.* My debit card allows up to 4,000 Euros withdrawn daily....Of course there is one important step I am keeping a SECRET for now...OZ in Kyiv ;)
     
  5. Plato

    Plato Private

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    Is this another tax evasion scheme? What is this "Secret" you are hiding! :) Don't let me call the forum admin/moderators on this...or worse the IRS.

    I'd treat forex like any other investment - no weird offshore accounts somewhere...or some shady Belizian accountant wiring my money all around the world just so I can have a shelter.

    I report my taxes. I know, I'm a sucker for all things red and blue.
     
  6. No Time

    No Time Private, 1st Class

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    Yo OzWiz. Thats good for you. You can keep your secret, but tell us where you learned that from.:rolleyes:
     
  7. OzWizard

    OzWizard Corporal Punishment

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    IRS?? To them OZ does not exist!

    Plato, I assure this is for REAL! It is my own strategy as I for one donot beleive in OUR government and powers to be to ROB us via this illegal TAXATION!

    My strategy i put together while living in a foreign country... and think how nice it is to keep 95% of your profits instead of 40 ish % ??? da, Da, DA!

    Everything I do with my broker is via email. I set up THE account, I ask for $$... and again - I AS A REAL PERSON DO NOT EXIST!! (hint, hint)

    Watch this ( zeitgeistmovie.com ) and you may begin to question your RED, BLUE ..... !!
     
  8. Pharaoh

    Pharaoh Colonel

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    Oz,

    Your idea might work well if you are dealing with a less than reputable brokerage. I believe that most brokerages require at least a copy of some form of ID in order to set up an account. They will also require that any money moving in and out of the account be from/to the name on the ID. This not only makes it a bit easier for your government to extract tax money from you, but also makes it a little harder for unsavory types to illegally move money via forex accounts. Personally, I have no desire to transfer cash to some place that doesn't even ask for an ID, nor would I trust them to return the money to me later.

    Of course, you could be using fake IDs, but that will get harder and harder to get away with as more governments upgrade their databases.

    Either way, I'd never risk it. I really don't want to end up spending quality time at Club Fed. If I ever get that averse to paying taxes, I'll get permanent residency in some tax haven on a nice tropical island.

    Good luck, you'll need it!
     
  9. OzWizard

    OzWizard Corporal Punishment

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    It WORKS & No LUCK !!

    ..... Luck is what happens when preparation meets oppurtunity!!

    Ok, I will spill the beans - so to speak. I have a long standing Ukrainian girlfriend. We opened a bank account in her name. then we opened a trading account in her name - ALL LEGAL!!

    We funded stated account, I trade it, I ask for money to be wired, I use the Debit Card to extract monies - ANYWHERE in the world!!

    NO USA Tax, now there might be UKR tax... ??? but this is UKRAINE - home to so much Black money... plus this Lithuanian bank is more secretive than the Swiss!!!

    Now the only REAL concern here is that this REAL woman could go after my account and funds - its all in her name!

    Well, 1st - I trust her, 2nd - she knows nothing about where this trading account is!! Of course she has access to the bank account... simply leave little money in there!!

    I do everything via email so she really does not know when, how, where....

    :cool:
     
  10. forecastingpips

    forecastingpips Recruit

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    Foreign exchange tax

    I could believe you OZ. For instance, if you happen to have dual citizenship with another country or you are simply from another country, you can open a legal account in the other country and use that account to trade in foreign exchange...They have debit cards everywhere now ...but i again warn about uncle sam...tax evasion is a federal crime...you may end up in a federal prison being the girlfriend of the Mexican mafia or the aryan brotherhood or worse the black guerilla family, just because u simply said: "I aint paying you nada!" LOL!
     

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