Taxable Incomes for Foreign Exchange Trades and the Impact of Obamacare

Friday, December 21, 2012

Taxable Incomes for Foreign Exchange Trades and the Impact of Obamacare

With Obama victorious in the presidential election, the controversial Patient Protection and Affordable Care Act looks set to continue as originally planned, along with the potential for a raft of new taxes. Whether you're one of the 56% of Americans who is against Obamacare or not, Democrat or Republican, the fact is that you're going to have to pay more in taxes. 

There are two reasons for this; your health insurance premium is going to rise, probably by around 10%, and also, you're probably going to have to start paying more tax on your income. One of the few ways you can help resist these changes is to ensure that you're paying the right amount of tax on your Forex trades.

What Does the PPACA Mean in Terms of Income?

If you earn more than $200,000 as many Forex traders do, you're going to find that you get stung by an additional 0.9% in taxes. There's very little you can do about this other than make sure that you aren't paying too much in the first place. Taxes across the board are also likely to go up, if the predictions of analysts are to be trusted.

Take time to get your taxes in order, and it won't feel like so much of a hit.

IRC 1256 vs. IRC 988

When it comes to tax classification, there are two different brackets that the IRS will prescribe, and they are IRC 1256 and 988. They are both different, and have their advantages and disadvantages depending on what you trade, and the results you get.

IRC 1256 is a contract which splits your trades 60/40. It is generally for those who trade options and futures. It is regarded as the most 'profitable' of the contracts because it classes 60% of your trades as long term capital gains or losses, and 40% as short term. It is always the better option when your account returns a positive result, for this exact reason. You can roughly expect tax rates of around 23%, which is considerably better than IRC 988.

IRC 988 is automatically given to spot traders, and is designed to protect against losses. Everything, including losses beyond the usual $3000 mark, is treated as ordinary gains or losses. This is good if you do not produce a net gain, but means that you could be paying around 12% too much if you are successful. Of course, choosing IRC 988 is to take a negative outlook on your prospects. If you think that you're going to make a loss overall, then why are you even trading Forex?

The Conclusion

Ultimately, the contract you are taxed by is generally chosen by you. While IRC 988 is given to spot traders, you can always swap over to IRC 1256; something advised by many accountants. The former is generally only chosen if risk is a real concern. It's not always possible to change, but in most cases it is, so if you're losing money through taxation, it's your own fault.

Forex trading profits are often decided in the details, and tax returns can be the same. You're in the market to increase your profits, so don't let them be cut by a poor taxation programme. When it comes to financial trading, it's prudent to always treat taxes as losses, because that's essentially what they are. 

Author: Jorge Rogers.

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