How to Manage Trading Fees And Taxes
Because Forex is the most prevalent trading market in the world, there is a confusing multitude of brokers, platforms and software systems available. There is also extensive advertising encouraging participation and often portraying Forex trading as a ‘tax-free’ activity.
Although Forex brokers are now required to make a declaration on the percentage loss factor for retail accounts, they are not always so up-front about the expenses you may incur when operating an account. There is no golden, ready-made opportunity waiting for you, as is often portrayed. Trading in Forex does cost money and there are tax implications.
As with so many aspects of Forex trading, it is of ultimate importance to do your research into the ‘real’ cost of each transaction, not just to see it in terms of how much you could gain (or lose) in the process and to err on the side of caution where the tax man is concerned.
In this guide, you will learn:
- The type of expenses you may encounter
- Tax on Forex trading and record-keeping
- Any potential consequences of tax-avoidance
What Trading Fees to Expect
Irrespective of the gain or loss incurred on a trade, there are always other costs to take into account. Brokerage costs vary enormously and shopping around is essential to find a broker and platform which suits your specific level and style of trading.
Costs will always include trading fees (either fixed or a percentage of your investment) and spread costs. Also, there may be account maintenance fees, rollover fees and a charge for deposit or withdrawal of funds. These are all factors that you should be made aware of by the broker of your choice.
If you elect to use automated platforms and specialist analysis software, there may be a subscription cost and although these may be small amounts, they will increase your overall set of trading expenses.
Lastly, there are sometimes other ‘hidden’ costs which you need to research. For example, some brokers will operate a ‘top-of-the-book’ policy. Usually, this is concerned with the most popular major currency pairs, offered with temptingly low spread values. It is quite likely that the majority of the other pairs on offer will not be on such preferential terms, or that the ‘offer’ applies to all transactions.
Forex is traded tax-free in certain circumstances and specific countries, although generally, that is not the case.
What Records Should I Keep
Forex is traded tax-free in certain circumstances and specific countries, although generally, that is not the case. For example, Forex transactions are often classified as a form of betting and therefore not considered to constitute taxable income in the UK. Beware of making any assumptions; tax laws can be ‘woolly’ to say the least.
You may latterly find that you are not liable for taxation on your Forex activities, but at the very least it is always wise to keep a brief (but relevant) record of every trade that you complete as part of your strategy, specifically for tax reasons.
As a bare minimum you should include (per trade): currency pair details, purchase and sale dates (if different), the price paid, entry and exit points, your specific payout or loss and broker costs.
On the plus side, while this may appear to be a tedious and time-consuming activity, if you think of it as providing you with the basis for a journal of your Forex activities, it could also prove to be a valuable tool.
If you want to pursue the journal idea, you can purchase custom software to maintain your records and accounts. However, it is most likely just as beneficial (and far less costly) to create an automated spreadsheet version so that you can also add personalised notes.
Do I Need to Pay Tax on Income
Taxable earning, or tax levied on profit from Forex trading varies country by country and it is essential that you thoroughly research the tax implications imposed within your location and circumstance.
Not only your own home country, but the location of your broker also has a bearing on whether your Forex trading is an income or a gamble. It is always best to trade with a broker whose location is in the same country and be sure to check this is the case carefully before signing up.
As you can see, the potential for tax liability can be dependent on various factors, not just profit and loss. One of the most important (and often overlooked) being your employment ‘status’ when you are trading.
In the UK for example, Forex trading is exempt from both Capital Gains Tax and Stamp Duty, unlike the stock market where both are payable. Generally speaking, your payouts are not subject to Income Tax and you cannot claim back tax against your losses unless your income relies solely on Forex trading.
The Consequences of Evading Tax
Penalties for tax evasion vary a great deal within individual countries. Some of the harshest are in the US, where it is often dealt with as fraud and carries hefty fines and potentially lengthy prison sentences.
In other countries, although penalties may be lesser, the invasive nature of a full tax investigation could in itself be highly inconvenient and intrusive for you. In the worst case scenario, a tax investigator may even freeze your accounts to prevent activity while you are under scrutiny.
As a rule of thumb, if you need to complete a tax-assessment, it is always wise to include your overall Forex profit. Doing so may avoid you the inconvenience of an unforeseen audit, a larger-than-expected tax bill or even a criminal record.
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