Forex trading is a very popular way to make money, but are forex gains subject to Australian taxes?
In this article, we’ll explore the tax implications of forex trading in Australia and give you some information about how to calculate your forex profits. We will also answer other important questions like: “Do you pay tax for trading forex?” and “Are foreign exchange gains taxable in Australia”.
The reason why this question is asked is due to the fact that people liken trading to gambling. We do not know the future and placing a trade is similar to making a bet.
However with trading in forex there are taxes to pay on the gains made, because you’re not gambling on something that is unknown or uncertain, but rather speculating based on known facts and trends.
While I am not a professional tax accountant or tax advisor profits derived from forex trading would be treated in the same manner as trading other financial instruments such as stocks, Contracts-For-Difference, or futures. Regardless of whether you actually held the physical contract, or instrument.
Therefore, if you are trading according to a predefined set of rules and are engaging in the enterprise to make a profit and you do make a profit you will need to keep some money aside to pay the tax bill at the end of the year.
When the ATO receives your first income tax return detailing the profits you have made you may be required to remit income tax on a quarterly basis. This reduces the risk of being able to pay your tax bill at the end of the financial year, but may not be necessary if you are only earning small profits.
Do I Pay Capital Gains Tax?
If you are regularly day trading in the forex market then you are likely to be classified as trading for a business. This means you will need to pay tax on the resulting net profit you have made at the end of the financial year as regular income tax.
If you are no day trading and are holding forex positions for long periods of time, as one would holding a share, then when you come to exit the position you would need to classify the transaction as a capital gain, and provided you held the position for over 12 months you may be entitled to the capital gains tax reduction (currently 50%).
Is Tax Payable On Swap Income?
When holding a currency position swap income is the difference between the interest earned from holding one currency and paying the interest expense on the other currency. Provided the interest earned with one currency is larger than the interest expense on the other currency the net result is then credited to your account each day you hold the forex position.
In essence the payment received is interest, and interest is taxable in Australia.
Therefore, the total net result of all swap income and expenses paid would be taxable if the result is a profit in Australia, but would also be an allowable deduction if the the result is a loss. Swap income would be subject to income tax and treated no different to income received from bank interest for holding a cash deposit in your bank account.
To learn more about calculating your income tax you might want to check our previous post on completing your income tax return.