Forex trading has become increasingly popular in recent years, with many people looking to make a profit through buying and selling foreign currencies. However, as with any form of investment, forex trading comes with tax implications that traders need to be aware of. In this article, we will explore how forex profits are taxed in 2018.
Forex trading is the act of buying and selling currencies to make a profit. Traders buy and sell currencies in pairs, with the aim of buying a currency at a low price and selling it at a higher price. The profit made from the difference in price is the trader’s forex profit.
In the United States, forex profits are considered capital gains and are subject to capital gains tax. The amount of tax that traders need to pay on their forex profits depends on a number of factors, including their tax bracket, the length of time they held the investment, and the amount of profit they made.
For short-term forex trades, which are trades held for less than a year, the profit is taxed at the trader’s ordinary income tax rate. This means that if a trader is in the 25% tax bracket, they will pay 25% tax on any short-term forex profits they make.
For long-term forex trades, which are trades held for longer than a year, the profit is taxed at the long-term capital gains tax rate. In 2018, the long-term capital gains tax rates are 0%, 15%, and 20%, depending on the trader’s income. Traders who are in the 10% or 15% tax bracket will pay 0% tax on their long-term forex profits, while those in the 25%, 28%, 33%, or 35% tax bracket will pay 15% tax on their long-term forex profits. Traders who are in the highest tax bracket, which is 39.6%, will pay 20% tax on their long-term forex profits.
It is important to note that forex losses can also be used to offset forex profits for tax purposes. Traders can deduct their forex losses from their forex profits to reduce the amount of tax they need to pay. However, there are limits on the amount of losses that can be deducted in a given tax year. Traders should consult with a tax professional to determine the best way to deduct their forex losses.
Another important factor to consider when it comes to forex profits and taxes is the foreign tax credit. This credit allows traders to offset some of the taxes they pay in foreign countries against their US tax liability. If a trader pays foreign taxes on their forex profits, they may be able to claim the foreign tax credit on their US tax return.
In conclusion, forex profits are taxed as capital gains in the United States. The amount of tax that traders need to pay on their forex profits depends on a number of factors, including their tax bracket, the length of time they held the investment, and the amount of profit they made. Traders can also deduct their forex losses from their forex profits to reduce the amount of tax they need to pay. Finally, the foreign tax credit can be used to offset some of the taxes paid in foreign countries against the US tax liability. Traders should consult with a tax professional to ensure that they are paying the correct amount of tax on their forex profits.