If the Commodity Futures Trading Commission adopts a proposed regulation to limit maximum leverage available off-exchange, many traders will move their accounts overseas where trading regulations are less stringent. In fact, many accounts have already left the United States following the NFA’s rules against hedging, and First-In-First-Out (FIFO) order execution. I have not moved my account overseas, although I probably will if regulation 5.9 is adopted by the CFTC. Trading with a reputable dealer through an overseas subsidiary is a straightforward process, but I was concerned that taxation snares may await U.S. based traders. To clear the air, I contacted Mr. Robert Green CPA/CEO, CEO & Founder of Green & Company CPAs LLC. Mr. Green is a well respected authority on trader taxes, and publishes many excellent articles via his website GreenTraderTax.com. In today’s post I’ll share Mr. Green’s response to my questions.

Note: This post does not constitute direct tax advice. The details of your situation are fact dependent, and I highly recommend you consult the services of a competent tax professional. I don’t think you will go wrong calling Mr. Green or visiting his forums at GreenTraderTax.com if you have questions.

Q: Are there any special forms a trader with an overseas account must submit at tax time?

A: All offshore bank and brokerage accounts need to be reported to the IRS each year on Form TDF 90.22-1. The FXCM UK accounts are foreign bank accounts (FBA). FBA reporting and the rules are clearly stated at www.irs.gov. It’s a simple tax form just listing account information. No income or wealth tax is
associated with the form. Non compliance has very stiff penalties, like $10,000 per occurrence. There was a big stink last year with non compliance on offshore accounts as part of the IRS vs. UBS (Swiss) tax battle and IRS voluntary disclosure program, which I covered on my blog.

Q: Are there any tax “gotchas” waiting for traders who make a profit in an Australian or European currency account?

A:  To date, we have not learned that US residents are taxed in the UK locally on their forex trading accounts. In most countries, including this being the case in the US, the non resident alien tax regime calls for no taxation on capital gains and losses – it’s not effectively connected income (ECI) or
“source income” – but there generally is local tax withholding on dividends and sometimes interest too. In the case of tax withholding, the taxpayer is generally not required to file a tax return, so there are no complexities or burden for tax compliance in a foreign country. Considering that there are
no dividends on forex and rarely interest too, and usually just trading gains and losses, forex traders should generally not have any tax costs in a foreign country. Traders should seek formal answers from local tax authorities and/or local tax professionals and also check US vs. other country tax treaties.

If a trader does pay taxes to another country, they can receive a foreign tax credit in the US, to prevent double taxation. However, if the foreign country tax rate is higher than the US tax rate, they will be paying that higher foreign country tax rate, since the foreign tax credit only allows a credit against the US tax rate amount. In the case of forex, the US tax rate might be 23%, the futures tax rate if the trader elected into Section 1256g. In the UK, tax rates are approximately 40%.

Frankly, it doesn’t sound all that bad in this trader’s opinion. I’d prefer to keep my account in the United States, but I will move if the CFTC adopts regulation 5.9.