Forex capital loss tax

Forex Taxation Basics.

For beginner forex traders, the goal is simply to make successful trades. In a market where profits - and losses - can be realized in the blink of an eye, many investors get involved to "try their hand" before thinking long term. However, whether you are planning on making forex a career path or are interested in seeing how your strategy pans out, there are tremendous tax benefits you should consider before your first trade.

While trading forex can be a confusing field to master, filing taxes in the U. S. for your profit/loss ratio can be reminiscent of the Wild West. Here is a break down of what you should know.

For Options and Futures Investors.

The two main benefits of this tax treatment are:

For Over-the-Counter (OTC) Investors.

The main benefit of this tax treatment is loss protection. If you experience net losses through your year-end trading, being categorized as a "988 trader" serves as a large benefit. As in the 1256 contract, you can count all of your losses as "ordinary losses" instead of just the first $3,000.

Comparing the Two.

The Solution: Choosing Your Category Carefully.

The two types of forex filings conflict but, at most accounting firms you will be subject to 988 contracts if you are a spot trader and 1256 contracts if you are a futures trader. The key factor is talking with your accountant before investing. Once you begin trading you cannot switch from 988 to 1256 or vice versa.

Most traders will anticipate net gains (why else trade?) so they will want to elect out of their 988 status and in to 1256 status. To opt out of a 988 status you need to make an internal note in your books as well as file with your accountant. This complication intensifies if you trade stocks as well as currencies. Equity transactions are taxed differently and you may not be able to elect 988 or 1256 contracts, depending on your status.

Keeping Track: Your Performance Record.

Rather than rely on your brokerage statements, a more accurate and tax-friendly way of keeping track of profit/loss is through your performance record. This is an IRS-approved formula for record keeping:

Subtract your beginning assets from your end assets (net) Subtract cash deposits (to your accounts) and add withdrawals (from your accounts) Subtract income from interest and add interest paid Add other trading expenses.

The performance record formula will give you a more accurate depiction of your profit/loss ratio and will make year-end filing easier for you and your accountant.

Things to Remember.

Deadlines for filing : In most cases, you are required to elect a type of tax situation by January 1. If you are a new trader, you can make this decision before your first trade - whether this is in January 1 or December 31. It is also worth noting that you can change your status mid-year, but only with IRS approval. Detailed record keeping : Keeping good records (and backups) can save you time when tax season approaches. This will give you more time to trade and less time to prepare taxes. Importance of paying : Some traders try to "beat the system" and earn a full or part-time income trading forex without paying taxes. Since over-the-counter trading is not registered with the Commodities Futures Trading Commission (CFTC) some traders think they can get away with it. Not only is this unethical, but the IRS will catch up eventually and tax avoidance fees will trump any taxes you owed.

forex gains and losses?

A quick question.

I trade spot forex through forex. I have some losses and I would like to to know how do I file these losses on turbo tax. I printed out my trading transaction history for during 2014, and on the transaction, it reported a loss for the year. I spoke to a cpa through turbo tax and he said that they wouldn't question if I filed my gains or losses through Box B(short term), under Scheduled D.

Here is my questions.

#1-I would like to clarify if its proper for me to continue to file these gains/losses under schedule D since I was never sent a 1099-b form, rather a printout from the forex website?

#2- is trading spot currency through forex, or fxcm considered a foreign currency futures "contract" ?

#3-I've read over time that i should enter gains or losses under section 988. Am I still entitled to utilize capital loss carry over?

I just like to officially know how to file it properly on turbo tax.

Any help is much appreciated.

Why do you want to report this?

Recommended Answer.

35 people found this helpful.

By default, retail FOREX traders fall under Section 988, which covers short-term foreign exchange contracts like spot FOREX trades. Section 988 taxes FOREX gains and losses like ordinary income, which is at a higher rate than the capital gains tax for most earners. An advantage of Section 988 treatment is that any amount of ordinary income can be deducted as a loss, where only $3,000 in capital gains losses can be deducted. Section 988 gains or losses are reported on Form 6781.

Report the gains/losses in this way:

Federal taxes - Wages & income - I'll choose what I work on - Less common income - Misc income 1099-A 1099-C - Other reportable income.

This default treatment of foreign currency gains is to treat it as ordinary income.

I've included a link to the Internal Revenue Code for your reference:

Why do you want to report this?

You don't show where to enter the loss, only that it is a loss. We know that.

Why do you want to report this?

thank you very much for your input. My other question is, instead of filing with section 988, am I able to file retail forex gains/losses under 1256? thank you.

Why do you want to report this?

No answers have been posted.

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How to Report FOREX Losses.

Forex traders can use their net losses to reduce their tax liability.

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Traders on the foreign exchange market, or Forex, use IRS Form 8949 and Schedule D to report their capital gains and losses on their federal income tax returns. Forex net trading losses can be used to reduce your income tax liability. However, the IRS limits the loss amount you can deduct each year and traders must calculate the amount accurately.

Review your monthly brokerage statement and match up each Forex trade’s buy and sell side. Do not include short or long term trades that are still open.

Go to the IRS website and download Form 8949 and Schedule D. After entering your name and Social Security number on Form 8949, select the box that corresponds to your IRS reporting basis. Start with Part 1 if you held the assets for one year or less. Move down to line 1a and fill in a description of the property. In column c, enter the month, day and year you purchased the currency pair, and in column d, enter the month, day and year you sold it. Enter the sales price in column f, and the cost in column g. Enter this information for all your trades. Add the total of columns f and g and enter the information on line 2. Fill in Part II, Long Term Capital Gains, for assets held longer than one year. Complete the form the same way you did for Part I. Put any negative amount in parenthesis.

Transfer the totals on Form 8949, Part 1, Line 2, over to Schedule D, Part I, line 1, 2, or 3. Remember to enter the information on the line that corresponds to the box you checked on Form 8949. Now transfer the totals on Form 8949, Part II, Line 2, over to Schedule D, Part II, line 8, 9 or 10, depending on the box you checked on Form 8949. In Schedule D, Part 1, go to the line you selected and subtract column e from column f and enter the result in column h. Repeat the same steps for the information you entered in Schedule D, Part II. Put any negative amounts in parenthesis.

Add up the gains and losses entered on Parts I and II of Schedule D. The IRS limits the amount of loss you can claim to $3,000. If the loss is less than $3,000, you can claim the entire amount. If the loss is greater, you can only deduct $3,000, but you can carry the amount that remains over to next year’s taxes.

Items you will need.

Brokerage statement IRS Form 8949 and Schedule D.

File Form 8949 and Schedule D with your Form 1040 Federal Income Tax Return.

File your return timely to avoid any late filing penalties that would reduce the benefit of your claimed Forex losses.

References (3)

Photo Credits.

Comstock/Comstock/Getty Images.

About the Author.

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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Forex Trading: Income or Capital Gain Tax in Canada?

I've always known that foreign exchange trading is treated as capital gain tax in Canada. But just to be sure before filing my taxes soon, I've decided to double check the facts from Canada Revenue Agency. As you know, the difference between income tax and capital gain tax is substantial. Income tax is taxed at your marginal tax rate. Whereas capital gain tax is a generous half of your marginal tax rate. That works out to a 10% to 20% difference. Taxes in Canada is generally simple to do. The problem though, is sifting through the cacophony of information within the Canada Revenue Agency to find out the applicable rules. I've copy and pasted a couple of relevant excerpts from the 2010 CRA Income Tax Interpretation Bulletin for the record. Basically, forex trading can be treated as either income or capital gain tax in Canada (surprise). According to IT-95R Foreign exchange gains and losses.

Where it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of goods abroad, or the rendering of services abroad, and such goods or services are used in the business operations of the taxpayer, such gain or loss is brought into income account. If, on the other hand, it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of capital assets , this gain or loss is either a capital gain or capital loss, as the case may be. Generally, the nature of a foreign exchange gain or loss is not affected by the length of time between the date the property is acquired (or disposed of) and the date upon which payment (or receipt) is effected.

As you can see, it is very vague. That's why forex trading can be considered income or capital gain tax. It is up to you and your accountant to figure out which works for you. A noteworthy point in the above excerpt is that the holding period is not taken into account. So there's no 30-day rule like in the states whereby frequent trading would miss out the capital loss credit if they re-purchase the same asset within 30-day of disposal. Update: Looks like I have misconstrued the above article with regard to capital loss. As Olga pointed out in the comments, Chapter 5 of T4037 defines Superficial Loss . In which if you repurchase your property (e. g. stock) within 30-days after a sale at a loss, then that initial loss cannot be deducted as a capital loss. More about the Superficial Loss rules in Canada can be found at WhereDoesAllMyMoneyGo. Further down the page in IT-95R, we have the following bullet.

A taxpayer who has transactions in foreign currency or foreign currency futures that do not form part of business operations, or are merely the result of sundry dispositions of foreign currency by an individual, will be accorded by the Department the same treatment as that of a "speculator" in commodity futures see 7 and 8 or IT-346R. However, if such a taxpayer has special "Inside" information concerning foreign exchange, he will be required to report his gains and losses on income account.

IT-346R Commodity Futures and Certain Commodities explains the tax treatment of speculation in the commodity markets.

As a general rule, it is acceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses with the result that only one-half the gain is taxable, and one-half the loss is allowable subject to certain restrictions, (hereinafter called "capital treatment") provided such reporting is followed consistently from year to year.

So there, we have it. Amateur forex traders, such as myself, can report our forex trading gain/loss as capital gains and losses. The reason being that forex trading isn't part of my business operation because I have another primary source of income (e. g. salary from another job).

Addendum via reader Lem:

I think you forgot to mention that in IT-346 bulletin it states the following,

8) If a speculator prefers to use the income treatment in reporting gains and losses in commodity futures or commodities, it may be done provided this reporting practice is followed consistently from year to year. If income treatment has been used by a speculator in 1976 or a subsequent taxation year, the Department will not permit a change in the basis of reporting. *Interpretation Bulletin CPP-3 discusses the effect of the income treatment and capital treatment on self-employed earnings for the purposes of the Canada Pension Plan.

so just like you said FOREX can be treated as a Capital or Income gains/losses. You just have to be consistent on your filing, exactly what CRA consultant told me. if you filed it as business in the very beginning yo can't change it to Capital Gains.