Taxes & The Australian Freelance Forex Trader

People engage in Forex trading for many reasons. Reasons can include a dislike of the nine ‘till five job routine, increased flexibility, time for other lifestyle activities and it’s something that can be done 24/5 allowing a trader to work around family and children.

So while you are enjoying managing your own time and engaging in the fascinating world of currency markets or foreign exchange do not forget you still have responsibilities to do your taxes. It does not matter which software platform or broker you are using, you alone are responsible for your taxes.

A collective moan can be heard when the realization hits, but it does not have to be a total buzzkill of being your own boss.

Be Prepared

If you earn an income from your Forex trading you will have to pay tax. Simple as that. Ignoring this is not a good idea as the tax office can impose some pretty severe penalties. How much you have to pay is determined by what you earn and lose within a years tax period You need to discover what the tax-free allowance is. If you come under the tax threshold and are exempt, or if you are liable for a 45% tax rate, you could save yourself a lot of money in taxes. It is not good business sense to be an ostrich when it comes to your taxes. Burying your head in the sand will not help, being prepared and organised is essential.

Know Your Liability

The Australian Tax Office (ATO) has clear definitions of trading for tax purposes. As a day trader, who only holds his assets for a short time; in contract with investment trading in say stocks, will be taxed on any gain you make from trading; bearing in mind that any losses can be claimed as tax deductible.

What The ATO Wants To Know

The ATO need to know if you are trading as a ‘hobbyist’ or conducting ‘business-like activities’

So how do they decide which activity you fall under?

Recent case law has given clarity to the ATO rulings in that when looking at you they look for:

Capital – How much are you investing and if you set aside a certain amount. In principle the higher the amount, the more likely you are to be taxed.
Motivation – if you are trading with the aim of turning a profit.
Behaviour – How often you trade, daily, weekly monthly or ‘when you feel like it’.
Skill – can you demonstrate that what you are doing is more involved than gambling on the markets, Do you use either fundamental or technical analysis.
Organisation – Record keeping of accounts, trades licenses. Are you a registered business with an Australian business number? Keeping records from your broker is a sensible way of having records of your activity when you make a claim.

Benefits Of Being Organised

To be clear profits from currency trading are classed as revenue and are taxable but,

If you trade from your home, some office expenses are claimable. Dedicated internet accounts are a deductible item
Websites, subscriptions, information gathering and journals are tax deductible.
Charting software is a depreciable capital expense.
If your yearly profit is under $20,000, you can elect to have your losses quarantined and offset against future year’s trading.
You can offset any losses in the year against any other assessable income.

The ‘Hobbyist’ Trader

If you do not fit into the ATO category for day traders; for example, if you only trade weekly or have an annual gross profit less than $20,000, or, maybe you managed to get a windfall. If any of these apply the ATO considers you as a hobbyist or in other words will tax you as with gambling. In this case, you will experience the following:

Your forex trades are input taxed. You’re still paying Goods and Services Tax (GST) but can’t claim GST credits.
Your standard personal tax structure will apply to all profits from your trades.
You can’t claim your losses against income.

Conclusion

Being a Forex trader is a serious commitment and not only do you have to learn the business but consider the broader implications. The ATO has extensive literature on its site, but the person best suited to help you, especially in the beginning is a tax professional. If you want to do it yourself here are a few final tips to help you manage.

Keep detailed records of everything – this is necessary if you are doing it yourself or using the services of a professional. It’s worth keeping this information for around five years. This should include:

Entry and exit points
Size of sale
Sale date and purchase
Price
Instrument

These records can nearly always be obtained from your broker, so do ensure you select one that is licensed and registered. However, it is important to note that the brokers themselves are not responsible for any of your tax obligations.

You can also set up an ‘asset register’ to store all your relevant information. Guidelines for doing this are available on the ATO website.