Do Forex Traders Pay Tax?
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Forex traders classified as residents of South Africa must declare all the income and profits they make from forex trading on their tax returns. Tax residents are taxed on all their income (local and foreign), so if you are considered a resident, you will pay tax. So, do Forex traders pay tax?
The answer is unambiguous ‘yes.’ Whether you make profits from your offshore forex accounts, you must pay taxes on them.
Do you pay tax as a trader?
As a part-time trader, your spread betting earnings are your secondary source of income, and they are tax-free. However, as a full-time trader who relies primarily on forex profits for income, you are liable for income tax.
How do traders get taxed?
Stocks owned less than one year before you sell them are taxed at the short-term capital gains rate, the same as your regular tax bracket. In the case of long-term capital gains on a stock, the tax rate would be 0%, 15%, or 20%, depending on your ordinary income.
Residence-based tax system
The South African Revenue Service (SARS) says the country has a residence-based tax system, meaning residents are subject to exclusions but are taxed on their worldwide incomes regardless of where they earned them.
No matter where income is derived from, the determining factor for whether it is taxable is where the person resides while generating the income. Therefore, the income of non-residents in South Africa is subject to income tax.
Declaring your profits from forex trading
The South African tax law requires all forex traders who reside in the country to declare all the profits they make from their trading.
To calculate the taxable profit from your forex trading, you must deduct all trading expenses from the gross income. Consequently, local forex traders should keep all documents and records associated with their forex trading activities. For example, it may be necessary to convert profits into a South African rand.
Interest and penalties are imposed when profits are not declared, just like when other income is not reported.
Business entities, such as private companies, corporations, and small businesses, are subject to corporate income tax (CIT) – see below for tax rates.
The income you earn from forex trading generally will not be subject to PAYE (Pay As You Earn), a monthly tax payment system administered by SARS.
Therefore, you must register with SARS as a provisional taxpayer. A provisional taxpayer must make two annual provisional tax payments – one before the end of February and one before August. After that, you can make the third payment. You can make the third payment after the end of the fiscal year but before SARS issues the tax assessment.
Provisional tax is not an additional tax but a method of spreading the tax liabilities over the tax year to avoid paying a hefty amount at assessment.
Every year, SARS receives a draft tax estimate on IRP 6 returns before the end of August and the end of February. A provisional taxpayer registration is also required for businesses. Taking taxes into account when you earn interest from forex trading
If forex trading is carried out during a given tax year, it will be added to other interest income. Only interest earned above the exemption will be taxed.
How much are forex traders taxed?
Currency futures and options are classified as 1256 contracts, and a 60/40 rule characterises gain or loss on them. It is possible to deduct the entire loss for spot forex traders since they are 988.
Is trading legal in South Africa?
In South Africa, Forex is legal since the government of South Africa has no laws regulating the matter. Therefore, trading Forex is legal as long as you adhere to financial laws that prevent money laundering and make sure you file tax returns.
Tips to pay less tax
Are you familiar with how you pay taxes on the returns from your stock market investments?
Investing in the stock market is an excellent way to increase your wealth and grow your income. But does that mean you will have to pay taxes on your shares? How can you ensure you don’t lose out on your return because of the tax you pay? And when you do, how can you maximise the amount you can put back into your pocket?
By understanding the different forms of taxes that apply to your shares, you can ensure that your portfolio can be structured in a tax-efficient way to minimise taxation and maximise return.
Residents of South Africa pay taxes based on their worldwide income under South Africa’s residence-based tax system. You will, however, have tax consequences depending on whether you invest in South Africa or abroad. Investment taxes fall into three types:
1. Income tax
Local interest: You will earn interest on bonds you own, cash in your bank account, and unit trusts. Your marginal tax rate will determine the tax you owe. Individuals under 65 are entitled to an R23 800 interest tax exemption. Individuals 65 and older are entitled to an R34 500 exemption.
Foreign interest: The South African Revenue Service (SARS) requires a rand equivalent of the interest you earn, regardless of the currency you earn it in. You can deduct foreign interest tax from the South African tax.
South Africa may reduce foreign tax rates if it has agreed with the country where the foreigner paying interest is located, provided it has made the appropriate declarations.
Interest from real estate investment trusts (REITs). Your marginal income tax rate applies to dividends earned from REITS.
2. Dividends tax
Foreign dividends: Foreign dividends are taxed following a formula that deducts any dividend tax paid by the foreign company. Foreign dividends are taxed following a formula that deducts any dividend tax paid by the foreign company.
Depending on the double taxation agreement that South Africa has with the country where the foreign company pays dividends, South Africa can reduce the foreign tax rate to a lower rate.
Local dividends: In the case of local companies, dividends earned are subject to tax at a withholding rate of 20%. The withholding agent withholds taxes like this before they flow to you. The tax has already been withheld when the dividend arrives, so you do not have to pay any tax on the dividend.
In the case of withholding agents (investment administrators), they pay the relevant taxes on your behalf directly to SARS. The South African dividends tax does not apply to dividends paid to South African companies.
3. Capital gains tax
Capital gains: Whether you are investing for the long term or speculating on the sale of investments if the gains are taxable as capital gains or income.
In this case, the difference between the base cost (amount paid for the investment) and the market value (amount realised on the sale of the investment) will determine whether there is a gain or loss, which is determined by whether the share price of a share purchased on the stock exchange has gone up or down.
The investment price might have increased, so you might be able to sell it for more. The capital gains of a natural person are taxable at 40%. Your marginal income tax rate will determine the amount of capital gains tax. Currently, the maximum capital gains tax rate for natural persons is 18%.
How much taxes will you pay?
A person’s marginal tax rate, net capital gains, and income type and amount all determine what kind of taxes they will pay. The more money you make, the more you’ll pay in taxes. When filing your taxes with SARS, be sure to disclose all income. You can reduce your investment taxes through various strategies.
Which Contract to Choose?
The tricky part is deciding how to file taxes for your particular circumstances. Investors can choose between trading as either 1256 or 988, despite options, futures and OTC trading separately. By the first day of the calendar year.
Contracts under IRC 988 are simpler than those under IRC 1256. Tax rates remain the same for both gains and losses, which is better when the trader has losses to report. The 1256 contract offers 12% more savings for a trader with net gains, even though it is more complex.
Spot traders use 988 contracts in most accounting firms, while futures traders typically use 1256 contracts. Therefore, you should consult your accountant before investing. Unfortunately, it is impossible to switch between spot and futures trading after you have begun.
South African traders with accounts at brokerage firms are subject to these rules.
Traders naturally anticipate net gains, so they often elect out of 988 status and into 1256 status. Make an internal note and notify your accountant of the change if you want to opt-out of a 988 status. There can be more complications if you trade stocks and currencies since equity transactions are taxed differently, making choosing 988 or 1256 contracts more difficult.
Tips to minimise the taxes you pay
You will automatically be taxed on capital gains by investing for more than three years if you hold equity shares, excluding dual-listed companies, for at least three years. This is because the tax rate on income is higher than capital gains.
1. Using capital losses to offset gains
Your excess capital losses can be carried forward to the following tax year to reduce against future capital gains. You should also remember that capital gains up to R40 000 per year are not taxable, so they won’t be taxed if your gains are less than R40 000.
2. Invest in tax-free investments (TFIs)
An investment in a TFI does not involve any South African taxation: neither on interest income nor dividend income. In addition, all income generated by the TFI can flow back into the trust without incurring any South African tax obligations. The only thing to remember is that the tax benefit disappears if you exceed the TFI contribution limits (currently R36 000 a year and R500 000 over your lifetime).
Can you make a living off Forex?
Those new to trading might wonder whether it’s possible to make money from forex trading, given that most small traders fail. What is the answer? Of course! Trading Forex can undoubtedly produce a reliable income.
Do forex brokers report to IRS?
Trades in FOREX (Foreign Exchange Market) are not reported to the IRS in the same way as stock and option trades. Instead, the IRS considers Forex trades simple interest, and gains or losses appear on Form 1040 as other income.
- Will I be charged any trading fees?
Well, most reputable trading platforms do not charge you any fees for allowing you to trade with them. Other fees, however, still need to be considered.
Depending on your payment method, you may be charged a fee for keeping your trading account open and a withdrawal fee.
- What’s the minimum legal age for Forex trading in South Africa?
As mentioned, forex trading is not subject to specific regulations, but some govern finances. In other words, the legal age is 18, as it is the age at which most Forex brokers accept their customers and the age at which you can send money overseas without parental consent.
- How do traders pay tax in South Africa?
Trading, however, is only taxed when it exceeds a certain threshold, which depends on the age of the trader. As an example, traders under 65 won’t start paying tax until their taxable income exceeds R75,750 per year (roughly R6,312.50 per month).
To earn a profit and not hold as an investment, foreign exchange trading will be treated as revenue, like being a self-employed, independent contractor, or freelancing individual. Therefore, to figure out your forex trading taxable profit, you must subtract all expenses from the trading from your gross income.
To calculate your tax owed, you must add your profit to the other income you earned, then apply the tax tables to determine the amount of tax due. Forex traders should keep all records and documents associated with their forex trading activities. When necessary, convert any profits to a South African rand.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst