Tax Benefits of Forex Trading

Forex trading allows you to have the best of both worlds. When stock prices go up, you can benefit from Forex trading. When stock prices go down, you can profit from Forex trading.

Inflation goes up, you can profit from Forex trading. Inflation goes down, you can profit from Forex trading. Similarly, interest rates can go up or down, you will profit from Forex trading.

You have to pay a capital gains tax for any investment in financial markets. Capital gains will be considered short term if it is less than one year. Short term gains are taxed at your current tax rate.

And if you hold the security for more than one year before you take profit, you will have to pay long term capital gains tax. Long term capital gains are taxed at a rate of 15% only.

But if you invest in Forex markets, 60% of your profits will be taxed as long term gains and only 40% will be taxed as short term capital gains whether you hold a currency for one minute, one hour, and one month or more.

Lets take an example. Suppose you invest $10,000 in stocks and $10,000 in Forex. Your tax bracket is 33%. Suppose you made a profit of $10,000 in both stocks and Forex each in six months.

Since your stock investment was less than one year, your profit will be treated as a short term gain. That means you will have to pay your current tax rate of 33% which will be (10,000)(0.33)=$3,300 and your profit after taxes will be only $10,000-$3,300= $6,700.

It doesn't matter whether you took profit in six months or one year in Forex, 60% of your profit will be treated as long term capital gains and 40% will be treated as short term gains. It means 60% of $10,000 will be taxed as long term capital gains at only 15% which is (0.6)(10,000)(0.15)=$900.

40% of your profits in Forex will be taxed as short term capital gains at your current tax rate of 33% which calculates as (0.4)(10,000)(0.33)= $1,320.

So the total tax that you pay on your Forex investment will be ($900) + ($1,320) =$2,220. But your tax on stock investment was $3,300 which is $1100 more than the tax on the same capital gain on your Forex investment.

Tax savings on Forex investment like that can add up fast. Profits can accumulate quickly by investing in the Forex market within your IRA or other tax-deferred retirement account.