Tax Implications for South African Forex Traders
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Several forex traders in South Africa are unclear about the tax implications for South African Forex traders. SARS does not see the gains made from their trading because many trading accounts are overseas. Some traders open trading accounts with forex brokers based in South Africa and brokers with local branches. In this case, their capital will not leave South Africa.
Traders in the forex market are primarily focused on making successful trades and seeing their forex accounts grow. Many people think about making money in the short term without considering the longer-term ramifications in a market where the value of money can change in a fraction of a second.
Nonetheless, it usually makes sense to consult a tax professional before making that first forex transaction. The article below is about the factors regarding tax implications on South African Forex traders.
Forex trading in South Africa
In South Africa, forex trading has flourished since it became legalised in 2010. Retail forex trading is becoming more popular and famous in South Africa, as many forex traders trade currencies between different countries.
South Africa and worldwide have seen increased trading volumes by electronic trading platforms. Almost 200,000 forex traders are estimated to exist in South Africa, according to December 2021 estimates.
Forex trading is a significant source of income for many South Africans and some. It is their only source of income.
Do I have to pay tax to trade?
It is a common misconception that income from offshore accounts is not subject to income tax. A South African resident who generates profit from trading in an offshore trading account while living within the borders of South Africa is considered to have average taxable income and needs to declare the profit in Rand in their tax returns.
The source of income doesn’t matter in this scenario but rather the location of the person who generated the income.
How is forex trading taxed in South Africa?
Many South Africans don’t understand the tax responsibilities of foreign currency traders. Due to this reason, some traders open accounts with forex brokers located in South Africa or with brokers with offices in South Africa. Some traders mistakenly believe profits earned from offshore accounts are exempt from taxation.
Tax returns must be filed in South African Rand by individuals who gain money from trading in offshore accounts while residing in the country. This expenditure is considered taxable income. Due to this, it is more important to know who makes money than where the money comes from.
By assessing Forex trading from the perspective of a South African resident’s responsibility to SARS, we can better understand how Forex income is taxed. SARS regulations regarding Forex income and how it is taxed are some of the things South African traders should be aware of.
Factors that make Forex income taxable in South Africa
A trader makes money by making predictions regarding the future value of various currencies, which involves estimating how much one currency will rise or fall against another when trading.
A currency pair’s value depends on various factors, including trade, economics, politics, and geopolitics. As a result of these conditions, traders can earn profits in the currency market by taking advantage of the daily volatility.
The South African or international brokers you choose will provide online trading platforms through which you can trade currencies from your phone, laptop, tablet, or PC.
The answer to your question regarding the taxability of Forex trading depends on the terms “trading” and “income.” You are strongly implied to use foreign exchange trading to make money (for profit here).
You will have to pay income tax on the income you earn from forex trading at your marginal rate if you make money from it. Put another way, you can deduct all expenses you incur to make money.
Your annual tax return in South Africa must include all your income from foreign sources, regardless of how much you make. Taxpayers also have to pay provisional taxes in August and February.
The income you receive will not be subject to PAYE, so this is not an additional cost but an opportunity to pay your annual taxes. Those relocated must follow the proper emigration procedures before leaving South Africa to avoid being taxed in their new country but still subject to South African tax.
SARS and SARB are the two agencies to contact if one wishes to leave South Africa. Capital gains taxes may be due after moving to another country depending on your circumstances.
The correct way to declare your Forex trading income:
- In the “foreign revenue” and “business/trading” sections, you will find the foreign revenue and foreign trading profit and loss. The tax rate will depend on an individual’s income by the SARS tax tables.
- When calculating revenues, the exchange rates used by SARS should be taken into account. SARS has a section dedicated to these issues on its website.
- The types of foreign exchange trading taxes that the South African Revenue Service (SARS) imposes
Taxation of a business entity
Before choosing an entity structure for a firm, various factors, including taxation and liability, should be considered. Whether you form a corporation in South Africa or elsewhere, consider that South African taxation will still apply to the corporation even if you move abroad until it dissolves.
Foreign exchange trading undertaken by South African registered firms is taxed at 28 per cent of taxable income, and no exemptions or deductions are allowed. However, small business corporations are exempt from tax in contrast to corporations until their annual taxable revenues are over R75,750.
Taxation of individuals
Whether individuals and special trusts trade forex is a matter of determining how much tax they will owe. Trading companies only have to pay income tax if their total annual income exceeds a certain level based on their age.
Any expenses incurred while earning money may be deducted from taxable income by forex traders in South Africa.
Local forex traders should account for all trading expenses, including staff salaries, training expenses, software purchases, office supplies, computer maintenance, and bank fees to maintain a record of all trading expenses.
Furthermore, the depreciation of assets may also reduce the taxable revenue (a laptop can wear out over time). Traders can deduct the depreciation of their computers from the earnings they earn from trading activities if their computers depreciate.
If your income is taxable, you can reduce it by reducing the expenses incurred to produce that income, whether incurred by a company or by a small business corporation/trust or if they are incurred by yourself.
Most forex traders in South Africa do not receive compensation from a legally recognised South African employer, a firm in the country, for their forex trading activity. Traders who wish to comply with the law must register for provisional tax and pay two provisional tax payments each year to make sure they are legally compliant.
As a “top-up,” there may be a third installment, maybe the third installment, to make up for any shortfall in the second installment.
SARS calculates tax payments based on estimated taxable income. IRP6 tax returns are then filed with SARS to show the provisional tax payments. A small amount of provisional tax is additionally due by companies.
Why is it so important to have an FSCA-regulated broker?
It is required to contact the Financial Sector Conduct Authority (FSCA) before a broker, advisor, or intermediary in South Africa can give advice or act as an intermediary.
The broker’s location does not matter whether it is based in South Africa or overseas. Make sure any broker you plan to hire is licensed to provide services in South Africa by checking their website.
In the same vein, before choosing a broker to represent you when moving abroad, complete a background check on them to ensure that they are licensed.
Forex Options and Futures Traders
The tax treatment of forex options and futures contracts is governed by Section 1256 of the Internal Revenue Code, a 60/40 tax calculation. Accordingly, 60% of gains or losses are considered long-term, while the remaining 40% is considered short-term.
Individuals in high-income tax brackets will often benefit from a 60/40 tax treatment. For instance, in the case of stocks, the proceeds are taxed the same amount as ordinary income, up to 37 per cent, when sold within one year after purchase.
Investing in futures or options is taxed at the maximum long-term capital gains rate of 20% (on 60% of gains or losses) and the maximum short-term capital gains rate of 37% (on the remaining 40%).
Your brokerage statements will give you an idea of profits and losses, but keeping track of profits and losses through your performance records is more accurate and tax-friendly.
Here is a record-keeping formula approved by the IRS:
- Calculate your net assets by subtracting your beginning assets
- Add your cash deposits (to your accounts) and subtract your cash withdrawals (from your accounts)
- Interest is subtracted from income, and interest paid is added
- Incorporate other trading expenses
- It will make year-end filing easier for you and your accountant because it gives you an accurate picture of your profit/loss ratio.
Things to remember
The following factors should be kept in mind when it comes to forex taxation:
- Mind the deadline: Most traders have to decide on their tax situation by Jan 1. New traders can make this decision before making their first trade.
- Keep good records: Tax season will be easier when you have good records. Then you will have more time for trading and less time to prepare your taxes.
- Please pay what you owe: Forex traders sometimes do not pay taxes on their trades because they think that they are beating the system. The CFTC (Commodity Futures Trading Commission) does not regulate over-the-counter trading, so some think they can get away with it. It’s important to realise that the IRS will catch up eventually, and the tax avoidance fees will be greater than any taxes you owe.
- Are forex gains taxable in South Africa?
Yes, it is without a doubt. You still must pay income taxes even when you generate profits in your offshore forex trading accounts.
- How are traders taxed in South Africa?
Gains and losses arising from the disposition of shares held as trading stock will be revenue-related.
You must pay income tax on revenue gains at your marginal tax rate, which may vary from 18% (but is effectively 0% if you include your tax rebates) to 40%, depending on your level of taxable income.
- Is forex trading illegal in South Africa?
Foreign exchange trading in South Africa is legal, provided it does not violate money laundering laws and profits belong to SARS (South African Revenue Service).
Before getting started, aspiring forex traders may wish to consider the tax implications.
There are 1256 contracts for forex futures and options, and gains and losses are taxed using a 60/40 rule, with 60% of gains or losses considered long-term and 40% as short-term. A spot forex trader is considered a “988 trader” and can deduct all their losses for the year.
Currency traders on the spot forex market choose to be taxed the same way as traditional commodities 1256 contracts or according to special rules under IRC Section 988 for currencies. In addition, 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 subtract all expenses from the gross income. As a result, local forex traders should maintain all records and documentation related to their forex trading activities. In addition, whenever possible, they should convert profits into Rands.
The time it takes to file correctly can save you hundreds if not thousands in taxes regardless of whether forex is a career path or you are simply interested in dabbling in it. So taking the time to do this is well worth the effort.
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