I Trade Binary Options. Should I Pay Taxes for My Profits?
Tax time is just around the corner. How are you going to report your binary options profits? The regulations and taxation of binary options profits is complicated so be sure to report them properly for your country.
I don’t know about where you live but it is tax time around here in the states. This means trying to figure out just how much you really owe to the government, big brother, the man. I got a lot of questions this year through email, the forum and my blog so I thought I would take a look and see what binary options traders have in store. The biggest question is how are binary options profits, or losses should that be the case, going to be classified? Not only is there the whole regulated-unregulated issue to consider you also have to keep in mind where you are. In the current trading environment it is possible for a person in a country that has no binary options regulation and treats profits as gambling to trade with a broker regulated in another country that classifies binary options as a financial instrument. I think you can see why there is so much confusion.
EU, US, IRS, ImFID, W2, ABC, 123
There are quite a few acronyms and abbreviations involved in the binary options tax issue. I think the most important two are EU and US. There is also the Japanese FSA to consider but I have almost no experience in that arena which leads me to something I forgot to mention before. I am not a tax professional or a certified investment advisor. I am just a dude who likes to trade and happens to be good at writing about it. If your trading profits or losses are bigger than a few grand, or if you are just unsure, I would definitely consult my local neighborhood tax preparer. So, back to the EU and the US since those are the two biggest players in the international binary options regulatory chess game. In the EU, because of CySEC, the MiFIB and EU economic passport binary options are classified as a financial instrument and binary options brokers are classified as financial and ancillary services providers. This means that your winnings are likely going to be taxed as capital gains but again, check with your local tax preparer. If not taxed as capital gains then your profits will more than likely fall into the category of general income since the brokers are not casinos. Some countries have a flat tax which I believe is in the range of 30%, others have tax brackets.
Things get a little more complicated in the U.S. because the CFTC does not recognize the brokers or options as financial services, the brokers are not registered as options exchanges or as casinos and because all the brokers are located out side of the U.S. Unless of course you are using NADEX and then I assume that all of your profits will count as short term capital gains. In the U.S. capital gains are divided into short and long term. Long term is any position held longer than one year, short term any that are held shorter than one year. I don’t know of any binary broker that has options that extend longer than one year so we can assume that if you claim your profits as capital gains they will be short term. If you have losses the IRS allows you to claim them as a deduction from your adjusted gross income with a limit of up to $3,000.
Now, because off-shore binary options are not regulated by the CFTC then profits may be counted as winnings from gambling. This means that you could claim them as such on your tax forms. Taxes on gambling are different for different types of games with a $1,200 flat tax on “slot machines” which may be the closest comparison. Here is where it gets really tricky. Casinos in the U.S. report taxable winnings on form W-2G. This means that if you win big, the IRS knows about it. Off-shore brokers are not registered as casinos and do not report to the IRS. This means that they don’t know about your profits any way, unless you withdraw them of course. If you don’t transfer your money you may never have to pay tax on it, but you may never be able to spend it either. You might be able to use Skrill or Paypal to help hide your money too, but that is getting into the realm of tax evasion and I do not recommend that. I recommend legal, lawful tax avoidance but not tax evasion. It is our duty as citizens of our countries to pay taxes, just not too much.
The Last Word
My last word on taxes….talk to your local professional. The landscape is unclear and I am sure there will be changes soon. Last year was the first year that binary options were financial instruments in the EU so I am sure there will be a lot of discussion about the state of taxation.
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