AtoZ Markets – As we know, forex trading is legal in Australia and there are many Forex brokers and successful traders in Australia. There are many successful Forex traders in the world who gained financial freedom by doing this business. Therefore, some countries encourage forex trading by making it tax-free and some countries make it illegal due to the risk associated with it.
The main participants of the Forex market are institutional traders. Therefore, the impact of tax on gains from forex trading has little impact on retail traders.
Before moving to the forex trading tax in Australia, let’s get a little introduction to the Forex market.
What is Forex Trading?
Forex market stands for Foreign Exchange Market. It is the world’s biggest and most liquid market. The main market movers in the Forex market are Central Banks, Institutional Investors, Insurance Companies, etc. The Forex market consists of a combination of two currency pairs.
For example, EURUSD is a Forex pair that represents two separate currencies or economy. Buying EURUSD means using US Dollars to buy Euro predicting that the European economy will be better than the USA. Conversely, Selling EURUSD means buying US Dollars using the Euro with the hope that the US Dollars will be strong in the coming days.
The unique feature of the Forex market is that anyone can invest in the market and can perform trading activities with a computer and internet connection. Therefore, the retailers’ involvement in Forex trading has been increased nowadays. However, the involvement of retail traders is very small compared to institutional traders.
Is Forex Trading a Taxable Income?
It depends on the country's Law.
In some countries, Forex trading is taxable while in some countries forex trading is absolutely tax-free. Moreover, in some countries, Forex trading is completely illegal. Therefore, it depends on which country you live to know whether it is a taxable income or not.
For example, Forex trading is a taxable income in Australia, Canada, Cyprus, Japan, the USA, etc. However, Forex trading is banned in Nigeria, South Korea, Bangladesh, etc.
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Forex Trading in Australia
Forex trading is completely legal in Australia. Moreover, there are many well-known and regulated forex brokers in Australia.
Most of the Forex brokers are regulated by The Australian Securities and Investments Commission (ASIC). ASIC is an independent Australian government body that acts as Australia's corporate regulator. ASIC's role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors.
As we know that Forex trading is legal in Australia, it is also a taxable income. In Australia, there are no specific tax rules for particular Forex markets but the tax rules for Stock markets apply to the Forex market.
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Forex Trading Tax in Australia
The Forex trading Tax in Australia applies to a person who is not a resident of Australia but has an income source in Australia.
Therefore, If you want to run a foreign exchange trading business through an Australian broker you should pay tax on the profits that you make. Many forex traders make several transactions a day. Maximum 60% of these trades can be considered as long-term capital gains/losses.
When trading forex, futures or options, investors are taxed at the following rate:
23% rate (calculated as 60% long-term x 15% max rate + 40% short-term rate x max income tax rate).
However, all taxes are applicable if the forex trader is profitable within the income tax assessment year. Therefore, in further we will consider that the Forex trader is profitable.
As we know, retail trading is just a small part of the overall Forex market. Therefore, Tax rules for Forex trading are calculated based on broader factors.
Division 775 of the ITAA 1997 contains regulations under which foreign currency gains and losses are calculated when they have been ‘realized’.
These Tax rules apply for the following forex realization events. Remember, these rules apply to gains or losses that are attributable to fluctuations in a currency exchange rate.
Forex Realisation Event 1
It occurs when there is a disposal from one entity to another of a foreign currency or a right or part of a right to receive foreign currency in Australia.
The time of the event is considered when the right or part of the right is disposed of.
Forex Realisation Event 2
It occurs when you cease to have a right, or part of a right, to receive foreign currencies in Australian dollars. In that case, the transaction value will be translated to the Australian Dollar.
Therefore, a right to receive income, a right that represents ordinary income or statutory income should be considered as capital gains tax (CGT) provisions.
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Forex Realisation Event 3
It occurs when you cease to have an obligation, or part of an obligation, to receive foreign currency in return for the creation or acquisition of a right to pay. This right to pay might be either in foreign currency or Australian currency.
This obligation should translate the amount in Australian currency by reference to an exchange rate.
Forex Realisation Event 4
It occurs when you cease to have an obligation, or part of an obligation, to pay foreign currency. It includes an obligation to pay an amount of Australian currency by reference to an exchange rate. The term 'obligation' includes contingent upon something happening.
The obligation, or part of the obligation, must cease and be one of the following:
- Expense or outgoing money you can deduct
- An element of a net assessable or deductible amount
- An element of a capital gains tax (CGT) asset
- Depreciating assets
- Option to buy foreign currency.
Forex Realization Event 5
It occurs when you cease to have a right or part of a right to pay foreign currency in return for specific types of obligation.
A right to pay foreign currency means the right to pay the amount that is calculated by reference to an exchange rate.
Calculation of Forex Trading Tax in Australia
After determining the taxable gains or losses from the foreign exchange we need to calculate the income tax payable in terms of Forex trading. We can calculate the income tax payable for Forex trading in Australia by following these rules -
- The cost is calculated by taking the amount you paid for the foreign currency in AUD + any acquisition costs related to it.
- You then consider the price you sold the foreign currency in AUD and subtract the cost base. Therefore, the difference is your “CGT taxable profit”.
- Therefore, if you are profitable overall by selling and buying foreign currencies and all of your trades are closed within 12 months' time, then your CGT on taxable profits will simply be taxed at your progressive income tax rate.
- On the other hand, if you hold the foreign currency for MORE than 12 months in trust or in your personal capacity you will get a discount.
- We can calculate the taxable profits by considering the Capital gain tax for holding foreign currencies for more than 12 months and subtracting that amount by 50%. Therefore, the amount is the income tax payable at your progressive income tax rate.
After the above discussion, we can come to the conclusion that the Foreign exchange gains or losses to be brought under the capital gains tax provisions that generally need to be held for more than 12 months. Therefore, there is a little impact on retail traders who trade through a Forex Broker in Australia as they usually do not hold trades for more than a year.
Moreover, tax is applicable when you make a profit and withdraw money from your forex account. For each withdrawal, you should calculate the gain or loss.
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