Trading is not free of taxation, as most traders already know. On top of that, it is also worth mentioning that almost every country out there treats income from trading differently.
For example, the US mentions a difference between traders and investors, whereas the UK focuses more on the nature of trading – be it speculative, self-employed activity, or done by a private investor
Regardless, all income gained from trading is subject to tax. On the other hand, if you trade with the best binary options brokers or stockbrokers out there, you may be charged less in commissions and keep more of your profit after taxes.
Trading Tax Terms to Know
There are a couple of terms that you need to know before you prepare to pay any kind of tax.
● Earned Income – this doesn’t refer to trading; it refers solely to the income that you make via your job. The trick here is to check if your country considers trading, even full-time, an actual job. If it does, then earned income via trading might be taxable.
● Investment Income – this type of income is a bit tricky, as it doesn’t include the type of gains known as capital. However, depending on the type of trading you engage in, it might. If you’re a day trader, for example, your investment income will be little to none and, as such, you won’t pay much on day trading taxes.
● Capital Gains – this refers to what you earn from buying and selling a certain trading instrument. In most cases, your country’s government will require you to pay taxes on these gains if you are engaged in a trade with them for less than a year.
There are more terms out there, obviously, but these were the essential ones. Basically, you have to determine the way your country sees income made from trading. Depending on the results, you may be taxed less or more.
Trading Tax Peculiarities
As mentioned above, trading tax laws vary from country to country. The UK, for instance, states that speculative trading is not taxable but, at the same time, you can’t claim benefits on losses.
Those that are actively trading as self-employed people are taxed, however, just as any other individual that works for themselves. Last but not least, private investors are taxed on both gains and losses, as per the capital gains tax laws.
In the US, on the other hand, one must fulfil certain requirements in order to be seen as a trader and taxed. For example, one must trade at least 16 hours a week, trade almost daily, use more than just a Forex no deposit bonus broker, and actually make some money.
The Bottom Line
So, how does one stay legal when it comes to taxes and trading? Well, they have to contact the respective entities/bodies and ask for information or read the tax laws themselves.
In general, one could avoid having their trading income taxed, but in countries such as the UK or the US, the bodies responsible for taxation may impose hefty fines if they find out that you’re skipping your tax liabilities.
