Saturday, September 18, 2010
This activity was once the sole province of large global banks, central banks, and other financial institutions due to large lot sizes of $1 million and average transaction amounts of $5 million. However, with the creative spirit of brokers to aggregate accounts, along with the advent of the Internet and sophisticated software trading platforms, the ability to trade foreign currencies was open for any consumer on the planet with the will, the capital, and a PC.
When the end of the year came around, most forex traders found themselves in a quandary as to how to prepare and report their various gains and losses from their trading activities. They quickly confronted an “unfriendly” IRS Tax Code that was extremely vague about treatment, tax rates, and where to enter anything on Form 1040. A majority of tax professionals were most likely confused as well since the language of the Tax Code had not kept up with the current state of affairs. Attempts to clarify some sections resulted in ambiguity in others. Matters have yet to be fully addressed, but weary traders have had to scan forex news and tax websites to do what is right.
The Tax Code assumes that trading in forex futures is similar to trading regulated futures contracts in the over-the-counter market. RFCs are not like securities where professional traders must treat everything as if it were ordinary income and expense related to a business activity. Forex futures contracts are accorded special treatment under Section 1256 where they receive a “60/40” split.
For example, 60 percent of the net gain for the year is treated as a long-term capital gain, and the remaining 40 percent as short-term capital gain. The rules apply equally to losses. Long-term capital gains are typically assessed at a lower rate of tax, such as 15 percent versus 35 percent at the high end of the ordinary income scale. These rates are scheduled to change in 2011 and do not include various state income tax burdens.
A subset of forex traders does trade forex futures contracts on the OTC exchange. However, most forex traders deal in the spot or cash forex market. To complicate matters, many traders transact business in both forex markets, including futures and spot. The RFC part of tax reporting is straightforward, although there was a move early in 2010 to eliminate the 60/40 split benefit, but it died in committee. This proposal will likely be raised again since the administration is searching for new tax revenue.
Brokers in the OTC space do provide 1099s at yearend with appropriate tax information. Spot forex brokers generally do not provide 1099s. By default, these gains fall under Section 988. In this code section, the gains and losses from forex are treated as interest revenue or expense, the net to be reported on Line 21 of Form 1040. Consequently, capital gains rules do not apply, the 60/40 split is not available for use, and unwary traders can expect to pay more if they do not know their rights.
Section 988 is further complicated by requirements to record currency value changes on a daily basis, but the IRS also permits a trader to opt out of these provisions. A forex trader may choose Section 1256 treatment for each separate transaction by opting out of Section 988 before each trade and maintaining personal records to support these elections. Most traders wait until yearend to make these decisions, but this bending of the rules will most likely draw IRS attention at some point.
The present situation is open to obvious manipulation and abuse. In order to minimize taxes, a taxpayer would only have to treat all losses as Section 988 to offset other ordinary income, and then treat all gains as Section 1256 to benefit from favorable capital gain treatment.
To complicate matters further, the IRS has provided Notice 2007-71, which states that “over-the-counter currency options” may no longer be treated as “foreign currency contracts” in Section 1256; instead they are now part of Section 988. Forex binary options have arrived on the scene in the past two years as if the IRS anticipated the arrival beforehand. An opt-out election exists for these, too.
Perhaps the IRS intended to clarify matters, but the 2007 notice and Sections 988 and 1256 remain conflicted and confusing as ever for most all forex traders and brokers.
The one positive point is that none of these revenue items are subject to self-employment taxes, a relief of sorts. However, forex traders would be wise to check with their tax professionals before filing their tax returns, especially regarding documentation for Line 21 items.
The new CFTC rules consist of 50:1 leverage decision as well as many other regulations for the industry. But there might be one big hidden rule: US clients won’t be able to open accounts with foreign brokers. This can be implemented by assigning the notorious 7995 credit card classification to foreign brokers – preventing American from depositing funds with foreign brokers. Here are the full details.
The CFTC finalized their ruling for forex, with the 50:1 leverage decision taking the headlines. The rules that will be in effect on October 18th, about 6 weeks from now are based on the initial proposals from January, but also on the Dodd-Frank act. And this is already something else:
In the past 24 hours, there’s been a lot of talk about one implication of the Dodd-Frank act – that US brokers won’t be able to open accounts with foreign brokers – including subsidiaries of respected and regulated US brokers in the UK.
Here’s what Rob Booker said on a comment on Michael Greenberg’s post yesterday:
The requirement that a counterparty to retail fx transactions be a U.S. financial institution has not changed. That is not part of the CFTC regs that were published today, but rather part of the ‘‘Dodd-FrankWall Street Reform and Consumer Protection Act’’ – the finreg that everyone has been talking about.
Francesc Riverola mentions and then emphasizes on a small comment on the official statement made by InterbankFX:
InterbankFX in its public note states: “Beginning October 18, 2010, overseas brokers will no longer be able to service U.S. customers.”
So, in order to protect the American public, regulation in the US may not be enough. “Protection” may go beyond dmoestic regulation – it may forbid US clients from opening accounts abroad.
In my report about the CFTC 50:1 ruling, I asked if US traders will run away. But maybe they’ll have nowhere to go to.
How can this be implemented? By blocking credit cards.
Every company has a credit card classification by the IRS. This is called Merchant Category Code (MCC). 7995 is the code for Betting/Casino Gambling.
US credit cards are often rejected when a client tries to fund an account with an online gambling company. This is one of the ways to prevent Americans from gambling outside the US.
This 7995 mechanism to keep money in the US already exists for gambling. Will it also be used for forex trading?
Now, I’m sure there are workarounds, and as Michael states, the gambling industry is still on its two feet. So, this may not fully prevent US clients from trading abroad.
But, it still might have a strong implication – the average American will virtually have no choice.
This year, a total of 10 retail FX broker firms were honored from a pool of close to 90 brokers nominated by more than 1000 traders in 111 countries. The FX Traders' Choice Awards offer the highest recognition a broker firm could receive and the most reliable results to traders within the fast growing retail Forex trading market.
Because of significant disparities in broker preferences from people in various continents, the FX Traders' Choice awards fall into two major categories: brokers with the widest client acceptance worldwide and brokers with the highest client satisfaction by continent.
Among Global FX Brokers – those with highest client acceptance worldwide - the FX Traders' Choice Awards evaluated how clients ranked these brokers in five sub-categories: Overall, Trading Platform, Client Service Department, Account Department, and Funding Department.
This year's nominees designated as Global FX Brokers were: FXDD, FX Pro, FX Open, IBFX, FXCM, Oanda, Alpari UK, FX Solutions, Gain Capital (Forex.com), IG Markets, e-Toro, Easy-Forex, and Saxo Bank.
The top firm in each sub-category received an Eagle award, whereas the 2 runner-up firms were honored with a Falcon award. A total of 30 awards were announced.
For each continental leader, the FX Traders' Choice Awards granted its highest recognition, the Best FX Broker Eagle award. The top 2 runner ups in each continent received the Falcon award. To measure client satisfaction, Forex Datasource drew on its expertise of Net Promoter Score (NPS), a well recognized statistical method to determine what firm counts with the highest net percentage of highly satisfied clients (promoters).
Full results to the 2010 FX Traders' Choice Awards can be viewed at the official awards website: www.fxtraderschoice.com
About The International Business Times
With over 5 million unique visitors per month, the International Business Times is a leading global financial newspaper online published in 14 countries and in 9 languages. IBTIMESFX, the Forex portal of IBTimes has grown during the past 3 years into a leader in Forex News, Analysis, Education, with over 1 million unique visitors per month. It aims to provide FX traders of all nations the most useful information available. Visit www.ibtimesfx.com
About Forex Datasource
Launched in 2007, Forex Datasource is a leader in the area of FX broker sentiment analysis and retail FX market research. Through the development of vote-inducing practices and use of statistical methods, Forex Datasource collects accurate trader sentiment information and crafts the criteria for FX broker evaluation. Forex Datasource also offers a portal rich in news, broker ranking information, and Forex education for retail FX traders. Visit www.forexds.com
About the FX Traders' Choice Awards
The FX Traders' Choice Awards is the result of a partnership between Forex Datasource and International Business Times (IBTimes) over the course of two years. The Awards are generated using the input of thousands of retail Forex traders from over 110 nations. The high integrity, scientific approach to data analysis, and vast geographic scope of the results make the FX Traders' Choice Awards the most reliable broker distinctions in the retail Forex industry. Visit www.fxtraderschoice.com
You can continue to doand find web sites that actually used the Pips Geek softwareon their own accounts. But honestly, it won’t do you any good.
Here is why:
1. If somebody used the software and made huge profits, that person will most likely keep their mouth shut. Writing review is a profession that pays very bad. So, don’t expect an honest review from a poor writer.
2. Let’s say somebody tested the software and it did not perform. Do you expect that they openly admit how stupid they were and then publish everything with their name in return for a few dollars that they get for the review?
So, either way, you won’t find any review of Pips Geek that will help you much.
Here is a way to get 100% reliable results with Pips Geek, 100% risk free.
There is a solution: Just go ahead and buy the software and then use it. You are not stupid. You will see pretty fast, whether Pips Geek makes you any money or not.
If it makes money you have basically a bonus for Pips Geek: You can keep the software and now you and only you know it works. Keep the software, keep your mouth shut and happily see your money double and triple fast. And in case they thing does not work, just ask for a refund and you are all set.
That is the only way how you will know. But you can wait a couple month and then read stories in the newspaper how people got rich using Pips Geek. But then it will be too late, as the market will be crowded and as you know, every forex robot works for a while and after a certain time the results get slim.
There is a company that offers free practice accounts. They also offer “playing money”. If you deposit just $50, they’ll give you $1,000to play with. That should be enough to get Pips Geek started and . $1,000 is not a lot, but if you let Pips Geek run for some time, it should make at least the that you paid for and the $50 that you deposited. After that you are completely in the black and you know it’s working. You can then add some money to your account to get larger gains, or let Pips Geek just work it up to where you want it to be.
When you purchase your copy of the Pips Geek software it comes with a money back guarantee, so you have time to put what I’m telling you to the test.
If it doesn’t work, simply return it and get your money back, no harm done.
So, to recap, here is what you do:
1. Get your hands on Pips Geek here.
2. Download eToro trading platform and install Pips Geek
3. Either deposit $50 and get $1,000 real money bonus and test Pips Geek with real money, of which only $50 was yours or, if you are too shaky, just let Pips Geek play with the practice account from etoro.
There is no risk. You can only win either way.