Forex Taxes

I am a self-employed US citizen, and earn a small annual income, and don’t work for an employer.

I have to file a 1040, Schedule C, and schedule SE at the end of the year for the self-employment income I earn (as well as paying state taxes).

I have been doing this since 2008 which is the last time I worked for an employer.

I prepay taxes quarterly in increments throughout the year (4 times a year) because the IRS will penalize you if you owe more than $1000 in taxes at the end of the year. Therefore you are required to pay a little at a time throughout the year.

This year I learned about Forex, and since July 2010 I have lost $5000 in Forex with little gain.

This huge loss was from various non-US broker accounts (and 1 US broker account).

So I won't be getting any 1099 forms from the US broker since there was no gain there (a loss of $800 from the US broker).

Now that it is tax time am I suppose to subtract the $5000 Forex loss from my yearly gross income on the 1040?

If so, this will give me a smaller net income that won't be taxed as high?

I have already prepaid 4 quarterly payments in taxes for my self-employment income earned since last January 2010.

But now that there is a massive Forex loss then that will mean I may have overpaid some of my quarterly taxes if it is true that I subtract the Forex loss from my self-employment gross profit.

If I subtract the Forex loss from my self-employment gross income will the IRS basically give me back some of the quarterly taxes I already overpaid since the Forex loss will lower my net income?

In this sense the IRS gives me back some of the $5000 I loss in Forex by returning to me some of the taxes I already prepaid for self-employment tax.

Or am I getting this wrong?

Maybe it is too simple to add the $5000 Forex loss to line 21 on the 1040 and subtract it from my self-employment gross income?

All the proof of my loss is in all my MT4 history tabs at the various brokers where I deposited and loss money. I saved all the usernames and passwords.

Yes, your understanding is generally correct. It is that simple, at least in forex land.

You call $5K loss in the first 6 months "huge"? Nah, you're probably doing better than most new traders, in any developed country...

Back to taxes... let's be more precise here. Your forex 1099 has nothing to do with whether you had a gain or a loss for the year. Your broker does not calculate, let alone report to government agencies, your forex gain or loss -- all calculation and reporting is your job, for better or worse.

The only information that forex dealers normally send to the IRS and, if relevant, your state tax agency would be net interest for the year, if it happens to be positive.

If you do get a 1099-INT from a given broker, enter the (positive) interest on 1040 Sch. B next to the broker's name. That way, red flags will not go off on your return at the IRS and state computers for missing known, broker-reported interest. Deduct the interest from the net gain/loss (in your case, loss), so that the interest is not taxed twice:

Forex net gain/loss =
ending value - beginning value + withdrawals - deposits - POSITIVE net interest

If the net interest is negative, there is no 1099-INT to match on your return, so do not enter negative interest on Sch. B. Do not deduct it from the net gain/loss, because it's already reflected in the ending value.

Repeat the above calculation separately for each broker.

Enter each positive interest separately on Sch. B.

Combine all gains and losses across brokers into a single figure and enter it on Line 21, Other Income, as "ordinary gain/loss from IRC 988 cash forex transactions."

Save on disk and/or print out hard copies of all supporting online statements and reports you relied on. Don't include any of them with your return.

Thank you very much nhct. I will see what I can do with the information you provided. I really appreciate it. The $5000 loss is huge for me (maybe not for someone else) because it is about 1/4 of my net income for 2010. I also spent another $2000 on training materials as well as EA's. I am not sure if I can deduct those expenses from Forex.

I found info about where to include a Forex loss (or gain) when using Turbo Tax so that it will show up on line 21:


In Turbo Tax, you want to select "Less Common Income" then "Miscellaneous Income". It will then give you a list of Misc Income sources to choose from. Select "Other Reportable Income."


In the description type in IRC 988 (IRC 988 is the IRS code dealing with currency transactions - including spot forex).


Enter the income as a negative number if you have a Forex loss.


Now the only question that remains is am I able to deduct Forex expenses (on Schedule C "miscellaneous business expenses") such as all the money I paid programmers to create EA's for me, as well as money I spent in buying indicators etc.?

I am already filing Schedule C because I have my own website busniness, but I also started (as of July 2010) to trade Forex for a living.

So I am wondering if I can deduct Forex expenses just as I deduct my website business expenses on Schedule C "Miscellaneous expenses"?

If you are an "investor" (the default, as opposed to a "trader") -- which it sounds like you are at this point -- and if you itemize, investment expenses are allowed only as miscellaneous itemized deductions on Sch. A Line 23, to the extent that all your misc. deductions exceed 2% of your AGI.

If you don't itemize, you're out of luck on those expenses.

If you were to qualify for and claim "trader status," investment expenses, home office expenses, etc. can be deducted on Sch. C for your trading business.

In any case, if you believe you will ultimately be profitable, you should consider carrying out all your trading as a business. At least a sole proprietorship or, better yet, a simple pass-through LLC... DIY online for a nominal setup fee + nominal annual fee in many states. I formed an LLC myself several years ago and it's worked out well.

Online retail forex taxation is a fluid, changing area. See GreenTraderTax and their useful blog to get up to speed on the latest developments and advice.

Thank you nhct. If anything it would be considered a business for me if I eventually sell one of the EA's I paid a programmer to create for me.

I spent over $1000 paying programmers, and none of the EAs are worth selling because they are based on lagging indicators even though the programmers did a excellent job.

I would only sell a EA that had mostly wins, and few losses, not one that has 60% losses and %40 wins, or 50/50 etc.

So if I ever do have a EA that is a winner, and I start selling it, then I can deduct the programming expenses and still not be LLC, and of course deduct taxes from the sales related to that ea.

Much of this goes to show that in many cases spread betting is a viable alternative as, in the UK at least, profits from betting are not taxable.

Although you may get poorer prices (though not at Tradefair most of the time), you wont have any tax headaches to deal with which is worth its weight in gold.

If anybody needs Tax Free forex money let me know.

Found out today that in the USA 60% of the capital gains are taxed at the lower, long-term capital gains rate (currently 15%) and the remaining 40% at the ordinary or short-term capital gains rate, which depends on the tax bracket the trader falls under (as high as 35%)

So i want you to tell me how much u pay in your country.pls follow the format;

Country = X%

(Comment if any)

It seems like the vast majority of traders online (at least here) are spot forex, not futures.

So if they "elect" out of IRC 988, then they still benefit from 40% taxed at 15% and the remaining 60% at the higher rate?

Supposing a NEW trader begins trading for a year, and then prepares to file taxes on his gains after the year is over, can he "elect" out of IRC 988 on his first time filing taxes for Forex earnings, or does he have to file something with the IRS BEFORE he starts trading in order to "elect" out of IRC 988?

let me ask this question to anyone that knows or cares to give me input im basically a newbie still been screwing with very little money on forex if i am just piddling around with just a small amout of money say under 500.00 and just learning if i make any gains this year say i double it to 1000 do you just report it on your regular 1040 next april until if and when i start making alot more then maybe setup an llc or something similar what have you experienced traders done if you dont mind letting me know,thanks

If I trade with a broker based outside of my home country, do I have to pay taxes in the country where my broker is based?

For example, if I trade with a broker based in the UK or Australia, would I be subject to taxes in those countries in addition to paying taxes in my home country?