FX trading is becoming increasingly popular globally. Currency trading offers various benefits to traders over investing in other asset classes, such as high liquidity, 24/5 open market, and accessibility. The market is full of highly competitive brokers with transparent pricing.
In many countries, such as the Bahamas, Dubai, and the Cayman Islands, Forex is not taxed and the only fees traders pay are trading fees to their broker. While in other countries, the tax laws regarding FX trading and taxation rates differ based on many criteria. Some countries have flat rates, while others have a progressive income tax.
Let’s discuss the currency taxation examples from various countries below:
Forex Taxation in the United States of America
In the United States, currency trading is subject to different tax rules, depending on whether trading is conducted as a hobby or as a business. Forex trading as a business is taxed by ordinary business income taxes.
Retail traders that trade using their own money are taxed by capital gains tax. It should be noted that both profits and losses are reported to the government. The specific tax rate depends on traders’ income tax bracket and the holding period of trades. If traders hold assets for less than a year before selling them, they are subject to short-term capital gains tax. The tax rate ranges between 10-37%. Long-term capital gains (holding assets longer than a year) are subject to preferential tax rates, which are generally lower than ordinary tax rates. The higher return is taxed at a higher rate.
- In the year 2022, the 10% – 12% income bracket was taxed at a 0% rate
- 22%, 24% 32%, and 35% income bracket – 15 tax
- 37% income tax bracket – 20% tax rate
Forex Taxation in the United Kingdom
In the United Kingdom, the taxation of currency trading depends on the status of a trader. Professional traders that trade for institutions are treated differently than private retail traders.
Institutional trading is subject to corporation tax. Individual traders are subject to Capital Gains Tax (CGT) in the UK. CGT is applicable when a trader realizes a profit. The tax is calculated on the net gains after deducting allowable losses and applying the annual tax-free allowance called Annual Exempt Amount.
In addition, in some cases, forex trading gains may be treated as income rather than capital gains. This typically applies if trading is your main source of income or if the trading activity is substantial and frequent. In such cases the CGT tax will not be applied, only the income tax.
Forex Taxation in Europe
In Germany Forex trading gains are considered to be a speculative income and are subject to income tax at the individual level. There’s a progressive income tax in the country and the amount Forex traders pay depends on their level of income.
In France, Forex trading is taxed by the Capital Gains Tax, also known as Prélèvement Forfaitaire Unique (PFU). The PFU includes social contributions and income tax.
In Spain and Italy, gains from Forex are also taxed by Capital Gains Tax. However, if trading is considered professional activity, it may be subject to income tax at the applicable rates.
Forex Taxation in Canada
Similarly to other countries, residents of Canada that trade currency pairs individually are taxed by the CGT. Capital gains are calculated as 50% of the realized gains and are included in the trader’s taxable income. The rate depends on the individual’s tax bracket.
When forex trading is considered a business activity rather than an individual investment, the profits are taxed by income tax rates. In addition, all trading-related expenses and losses will be deducted from the trading income in the tax calculation.
If currency trading is conducted through a corporate entity, such as an investment firm, the profits gained from the trading activity will generally be subject to corporate tax rates.
Forex Taxation in Japan
In Japan, the National Tax Agency (NTA) governs forex trading taxation. Income from currency trading in Japan is categorized as miscellaneous income (Kakutei Shinkoku) and is subject to income tax. The trading gains are added to the individual’s total income for the year and taxes using progressive taxes. Any losses incurred from forex trading can be offset against the gains made in the same year. It should be mentioned that corporate traders are subject to corporation taxes.