Did you know that by investing in foreign exchange, or Forex, you could actually receive a few tax advantages? In fact, some are able to get better tax advantages by investing in this type of market over other types of trades, such as stock trading. It is always important to consult with your tax accountant before investing for this reason, or before filling out your federal taxes.
What to Know
If you are investing, you could be cutting your taxes. Forex currency trading online can help you to do this. However, there are a few things to know before you begin.
- Traders can choose how taxation will affect them. The investor can choose taxation under the regular commodities rules (Section 1256 of the IRS Code) or through the special rules (Section 988, Treatment of Certain Foreign Currency Transactions of the IRS Code) depending on the type of trades they make.
- In some cases, there are benefits to foreign exchange trading over other types. Specifically, currency traders are able to split capital gains using a 60/40 percentage split using Schedule D to do so.
- One of the biggest factors affecting this taxation rule is the fact that the value of the currency changes so frequently. This allows the trading activity to fall into the Section 988 section.
It is quite common for investors to make investments based specifically on tax advantages, but that should not be the only reason you invest like this. It is best to take the time to learn about the investment options you have and to choose based on the features important to you (such as liquidity of your investment and risk.)