Forex taxation in the Commonwealth explained - Kalkine Media

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Wherever you live, it’s best to know your tax obligations while trading forex. You will need to answer questions like–should I report my earnings, and how much do I need to pay?

Taxation on forex trading is different from country to country. Whilst it is completely legal to trade forex in a great many nations, it is outlawed in a few places like South Korea and Bangladesh.

Canada, Australia, and the UK are major countries in the Commonwealth, and each of them applies its own taxation laws. Here are some tips to understand the main differences:

UK

Your tax liability in the UK is influenced by which of the three main categories you trade under:

Speculative trading – This is treated a little like betting. You are not subject to income tax, but at the same time, you cannot claim losses.

Self-employed trading – You are compelled to pay business tax since you are acting as a self-employed individual.

Private investor – Under this trading category, you are subject to Capital Gains Tax.

What type of instrument does Forex trading fall under in the UK?

The tax on forex trading in the UK is influenced by the instrument through which you are trading:

Spread betting - Spread betting income is tax-exempt. Spread betters speculate on price changes of assets they don’t own. The drawback is that spread betters cannot claim losses against their other personal income.

Contract For Differences (CFD) - CFD traders are subject to Capital Gains Tax on any earnings.

Are you a full-time trader just making additional income?

If you are a part-time trader, your earnings from forex trading activities are considered your secondary source of income and are tax-free. Full-time traders are liable to pay income tax as this is their primary income.

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Canada

Taxes on forex trading in Canada can be split into two distinct brackets:

Capital Gains – This is the less frequent taxation method that is applied to infrequent investors. The taxation rate is attractive as it is half that of the marginal tax rate. But tax authorities are careful to monitor who is an infrequent investor and who is not.

Business Income – This is applicable to most amateur investors who can be classified as day traders. Earnings here are classified as business income, which is fully taxable at the marginal rate.

One big benefit of this taxation type is that you can deduct losses against other earnings. Another major advantage is that you can claim expenses related to your trading activities as long as you can show receipts.

Classification Requirements

To classify which bracket you fall under, and to see whether you can get the better of the two types of taxation, the law makes a distinction based on a number of clarifying questions such as the frequency with which you trade, your investor knowledge, whether you have liquid assets, whether this is your ordinary business, and what is your motivation for trading.

Australia

Forex Trading Tax in Australia applies to residents and non-residents of Australia who have an income source in Australia.

Therefore, if you live in another country and you make money on the Australian market through an Australian broker, you need to pay tax on your earnings if you are profitable, just like local residents.

The forex tax rules apply to day-traders and come down to the following distinction:

Income – If you trade full time intending to generate an income, you will be treated as a business.

Frequency – If you trade frequently and methodically, your activities are considered ‘business-like’.

Tax is applicable for ‘business-like’ traders when you make a profit and withdraw money from your forex account. For every withdrawal, you should assess gain/loss.

Author Bio

Adrian Ashley is a business and finance writer. With a corporate career spanning twenty years, he has developed deep experience in varied areas such as business, finance, technology, robotics, and macro-economics. He is passionate about capturing the essence of mega-trends such as IOT and AI and distilling them for a lay audience. Adrian holds an MA, as well as a Master of Business Administration degree from the Gordon Institute of Business Science, a regular FT Top 100 rated school. Adrian has bylines in publications as varied as Rolling Stone and ITWeb.