How to File Profits Generated Through FOREX Trading
Profits from successful foreign exchange trading are taxed under IRC 1256, which is better known as the "60-40 rule." In this, 60 percent of gains are treated as long-term capital gains for the purpose of taxes while the remaining 40% are treated as short-term gains. This may sound complicated, but there's a relatively simple process for calculating the amount of taxes that you owe on your trading profits for foreign exchange.
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Instructions
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Pay your taxes on foreign exchange. The IRS lacks the resources to monitor all foreign exchange accounts, so it can be possible to avoid paying taxes for a long period of time. Eventually, the IRS will catch on, and you'll be obligated to pay far more for the tax evasion in interest and fees than you would have if you had paid the taxes on time.
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Take a look at your foreign exchange brokerage account statement for the taxable year. Take the money in your account at the beginning of the year and subtract it from the amount you possessed at the end. Subtract from that number any deposits into your account and add any withdrawals. Add any interest paid on the account and subtract any interest that you earned. Finally, add all other expenses and fees attached to the account. This final number will stand as your trading profits for the year.
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Take your trading profits for the year and multiply it by .6. Take the product of that equation and multiply it by the long-term capital gains tax rate. Then take the remaining 40% of your trading profits and multiply it by the short-term capital gains tax rate. The tax rate that you will pay is different depending on your income tax bracket.
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Fill out form IRC 1256 and submit it to the IRS before your taxes are due. Include all payments. You will need to pay your taxes in dollars even if your foreign exchange gains were denominated in other currencies. Your gains are calculated in dollar terms.
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