Forex Trading has Tax Advantages
Forex trading lets you profit from the financial markets no matter what happens to stock markets. Stock markets can go up and down but you can always profit from forex markets.
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 gain tax for any investment in financial markets. Capital gains will be considered short term if it is less than one year. Short term capital gains are taxed at your current tax rate.
And in case, you hold the security for more than one year before you take profit, you will have to pay long term capital gain tax, taxed at a rate of 15% only.
Forex investment has a tax advantage as compared to the stock investment. In case of forex, 60% of your profits will be taxed as long term capital gains and only 40% will be taxed as short term capital gains whether you hold forex for one minute, one hour, and one month or more.
Lets make it clear with an example. Suppose you make $10,000 investment in stocks and $10,000 investment in forex. Suppose your tax bracket is 33%. And lets suppose you made a profit of $10,000 in both stocks and forex each in six months.
Since, you are in 33% tax bracket and you took profit within six months on stocks, your profits will be taxed as short term capital gain. That means you will have to pay $3,300 as tax and your profit after taxes will be only $6,700.
It doesnt matter whether you took profit in six months or one year in forex, 60% of your profit will be treated as long term capital gain and 40% will be treated as short term capital gains. It means 60% of $10,000 will be taxed as long term capital gain 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.
