Need Help with Research for My Book

[Black Knight]

 
Howdy folks...

I'd like to enlist your help as I put the finishing touches on my upcoming book (http://www.harriman-house.com/pages/book.htm?BookCode=401327).  Actually, rather than calling it "my" book, I really ought to call it your book.

As those of you who have been on my site for a while now know, when I first set out to write this book the goal was to create the sort of book I wish I had when I was learning.  When someone asks me for the perfect book on forex trading, I inevitably end up recommending 3 or 4 titles and not just 1.  My wish is that this book changes that, and finally there will be a complete guide, arming a trader with everything they need in order to succeed and not end up like the other 95%.

To that end, the book will contain a section on tax considerations.  While I am fairly familiar with the specifics on how profits from trading are declared in the US, and on which forms, I would also like to include information for traders in the other major English-speaking countries (Australia, Canada, New Zealand, and United Kingdom).  If you live in any of these countries, I would appreciate your response to this post with some information on the following:

How are trading profits declared and on which forms?  Is forex treated differently from other types of trading?

Are trading profits called "capital gains" in your country, or is there some other commonly used term?

Are there limits in your country on types or amounts of deductions for expenses and losses?

Are there advantages to incorporating vs. trading as an individual in your country?  If so what type(s) of corporations?

Do these corporations allow you to deduct such things as computers and trips to conferences?

Can you do this as an individual or only as a corporation?

Lastly, if you could please provide some links to the relevant pages of your country's tax authority's website, that would be great.

Thank you all very much in advance!  Your assistance is invaluable in helping me create the best resource I possibly can for traders around the world.  I think this would also make for a very informative discussion thread in this section of the Forum as well.

[Blackbird]

I would love to help you Andrei but unfortunately I'm not living in a english speaking country. 

In Italy spot forex is not yet taxed/regulated yet... As long as you don't hold the position for more then 6 days it's free, otherwise you have to pay 12,5% capital gain tax.

[JJBungles]

Andrei-

For Christmas I got a UK tax book called "How to Avoid Tax on Your Stock Market Profits" by Lee Hadnum LLB ACA CTA, from the Tax Cafe (taxcafe.co.uk) dated March 2008. ISBN 1 904608 73 6

There are 25 Chapters relating to UK tax considerations.  I focused on chapters 23 and 24 because they relate to a forex trader.

According to the book - HM Customs and Revenue has guidelines that "test" your motive for buying and selling.  Frequency, length of time, financing (using margin/leverage?) are some of the tests that are used by the UK Tax man.

The test allows the individual taxpayer to select what classification you are: either a Share Investor or a Share TRADER.  Basically a Share INVESTOR is one who buys long and hold for 3 months to 1+ year and handle a portfolio of a multitude of financial instruments enter and exiting no more than a few times a year. A Share INVESTOR is more interested in dividends and accumulation of capital. As a Share INVESTOR you can enjoy an exemption on your first £9,600 of capital gains (not dividends) for tax year Apr 2008 - Mar 2009 per individual.  Capital gains thereafter are be taxed at 18%.  Share INVESTORS also enjoy TAX FREE gains on spreadbetting.

A Share TRADER on the other hand buys and sells the same instrument many times over the period of the year, goes short and long and is only doing this activity suffices as an 'occupation'.  All profit and losses are counted solely as income and this can be taxed up to 40% PLUS pay National Health Insurance all on a quarterly basis. (Close to 50% tax on all your profits).  Expenses and capital goods for trading can be deducted from this profit line but are limited to buying computers, trading seminars and travel to seminars, etc (see your tax accountant for all legal expense write-offs). To date a Share TRADER has not been challenged on spreadbetting profits as income but the law could be interpretted if HM Customs and Revenue chose to challenge the trader.

A Share TRADER status has the worst tax implications because of the higher tax bracket for individual taxes. 

The alternative to this is to trade under a UK Limited company where trading profit is treated as income and 22% of the first £300,000 tax is applied on the NET profits (meaning from a company stand-point you have a bit more lee-way on expenses that are allowable to reduce the gross profit witout it showing up as personal income - once again see a tax accountant). Also if you have a significant other or partners and you divide the company ownership equally, you can all enjoy the the first £26,500 of after tax profits at 0% personal income tax and £450 per month payroll includes your pension and national insurance stamp. If you take out any additional profits from the company they are taxed as a company dividend at 25% on your personal income tax (this works out to be 45% cumulative tax - 22% corporation tax and 25%  personal dividend tax) which is still less than you would pay if you paid your self a salary (40% income tax + national insurance).

Because I am already a business owner of a UK limited company all these laws, procedures and reporting come easy to me.  With a good limited company tax accountant you can also do the same. Also it costs less than £100 pounds to start a limited company.  There are some corporate governance and filings, but as Robert Kiyosaki Author of Rich Dad Poor Dad says, "Rich people run businesses because of the simple mathematical equation of Sales - Expenses = Net Income which is then taxed.

Personal finances have the following mathmatical formula:  Income - tax = Net income.  Because all legal expenses are written off BEFORE taxes having a company to utilise this accountacy rule makes perfect sense for traders. The limited company enjoys 22% tax instead of 40% and there is a corporate liability veil which can protect your personal wealth.

Andrei - there is much more to UK taxes and this is what I found in the above referenced tax book. The above fit my investigation and advised me (for my situation) how best to report trading on taxes.

I hope this helps....

[robrine]

In Canada, it is similar to the British way above.

Here is the official talk on the matter:

http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html
http://www.cra-arc.gc.ca/E/pub/tp/it346r/it346r-e.html

[Streetpips]

What's up BK-san? It's ya boy streetpips, I'm doing business in Nevada because there are no state taxes, my LLC is formed there, I'd rather do business under any LLC than as an individual and in Cali the will eat you alive if you are trading as a natural person for sure, and it's funny well rather interesting that I saw this section because I just finished forming my LLC and now I'm looking for a tax attorney to assist me on what I can and cannot do, I work in a building full of attorneys so I will provide a link for you because you dont ever wanna go off of hear say so I will get the link put up asap. Happy trading everybody

[cloud bank]

Hi Andrei,

I'm from Australia and the tax ruling seems a bit complicated to me as I'm new to this myself, but here's a link to start you off. I think best to contact the Australian Tax Office to get succinct answers.

http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/34749.htm

Hope this will guide you to the right place.

cloud bank
p.s. many thanks for introducing your system to me.

[Black Knight]

 
Thanks, mate - much appreciated!   

[Stony Broke]

Just a quick note re tax profits on Forex.

You can only be subject to capital gains tax if you dispose of an ASSET. If for example you borrow money (let's say you take out a mortgage & roll the loan say from GBP to USD to JPY etc & in doing so the mortgage is reduced via the forex gain assuming you get it correct! You cannot be taxed on a LIABILITY reduction from in a captial tax sense. You must dispose of an asset. This is why multi currency mortgages are so popular among large property investors.

Could this same structure be applied to basic forex trading? I don't see why not but it seems difficult to find one well rounded broker for everything. Then again you're back to the Trading - V - Capital debate & will need to run through "the badges of trade" tests that JJ Bungles alluded to. To date, tax matters relating to forex transactions have not been well tested in the courts.

When BK sets up his brokerage, we'll get onto this))

[Davide]

One thing to keep in mind is that in most OECD countries, tax laws includes Controlled Foreign Corporation (CFC) rules. These rules make it difficult to legally separate yourself personal and offshore corporate income.

My experience is in Australia, where it is practically impossible to accumulate profits offshore without incurring local tax. This includes trusts, foundations and offshore structures. The best that you can hope for is 20% corporate tax with a locally incorporated company.

The rules in Australia don't target specific types of offshore legal structures. Rather, they include phrases such as "effective control", "ability to control" and "effective ownership". This kind of language invalidates most offshore tax planning, as

The only option you are left with in this case is to look for a double tax agreement within the OECD which gives you some kind of tax advantage. The places to start looking include Switzerland, Luxembourg and the Netherlands.

[Black Knight]

 
Yes... it is the "effective control" part which is tricky.  You must have several layers between you and your company.  Ownership is easy enough to deal with - incorporate with a board of directors who sign their own resignations at the first meeting.

But in the book I'm not going to go very deep into offshore tax planning (we'll leave that to the experts) - the idea was more to give a summary and comparison of how capital gains are treated in some of the major English-speaking countries.

You seem quite versed in this stuff, Davide... are you able to assist users with their financial planning needs?

[MarpleTrading]

In The Netherlands you do not pay tax on profits made from trading. There is however a tax of 1.2% on you total average wealth in one year, when it exceeds €21.000. There are some further exemptions like the house you live in, and some investments in venture capital and eco-investments.

Your total average wealth is calculated by adding together your total wealth at 1 January and 31 December and divide the outcome by 2.