If you’re one of the few successful forex traders, your struggles aren’t over yet. You now need to figure out how much tax you’re going to be paying on your trading profits to keep out of trouble. Due to the fact the majority of forex traders never reach profitability, there is a limited amount of information out there about taxing forex profits in Canada. With that being said, how does tax work for Canadian forex traders?
Forex trading in Canada is taxed at the standard rate for Capital Gains Tax. This applies to any trading profits over $200. Some traders do opt to tax their trading profits as personal income but this will greatly depend on your personal situation and other incomes.
How Does Tax Work For Forex Traders In The Canada?
As if forex isn’t tricky enough, working out how much tax you need to pay on your trading profits isn’t simple either. On a slightly more postitive note, Canada is fairly lenient when it comes to taxation, compared to the states.
Forex trading profits in Canada are taxed at the standard rate for capital gains. This means that if you’re a part time trader and only make $1,000 in profits throughout the year, this amount will be taxed as income rather than at the forex trading capital gains rate.
If you are making more than $200 in forex trading profits, these earnings will need to be declared on your income tax return.
How Do I Declare My Forex Trading Profits In Canada?
If you are making more than $200 in forex trading profits, these earnings will need to be declared on your income tax return. To do this, you’ll need to know which of the following forex trading tax methods you’ll want to use.
The first is to declare forex trading profits as personal income. This means that you’ll be taxed at your marginal tax rate once the total amount of Canadian income reaches $4001, which will be between 15%-20%
The next option is to choose to declare trading gains as a capital gain instead. There are two ways you can declare your trading gains as a capital gain.
The first is to claim 40% of all profits made from forex trading. This is done by multiplying the total amount of forex income by 0.4, then declaring this amount at line 127 on your tax return. The reason for this is that you are taxed only once the overall income reaches $4001.
The second method is to declare forex trading as a business. If the money made through the business aspect of your forex trading strategy exceeds $200, you can declare these gains at line 174. This means that all your income from the trade will be taxed at 47%. It’s very important however to note that you’ll need to have a good case for why you want to declare your trading as a business.
Are Forex Prop Firm Earnings Taxed In Canada?
Since the explosion of online trading prop firms like FTMO, taxing these profits have become more of an issue. This is a topic that I would highly recommend seeking the help of a tax expert or accountant for.
From the funded traders I know personally, the majority of them have setup businesses to run their trading profits through. This may cost actually work negatively in Canada due to the tax rates being so high. However, the reason for this is that they were under the assumption that their profits would be taxed as personal income and not capital gains.
Finding A Forex Accountant In Canada
Although reading the tax regulations and guidance online is a good idea, I’d highly recommend getting an accountant that specialises in CFD trading. Regulations change very frequently and if you do not update your returns on time, you could be fined or penalised later down the line.
Although it can be done yourself, the cost is fairly small compared to the fines that you may incur from making any mistakes on your tax documents.
In Conclusion – Is Forex Trading Tax Free In Canada?
In summary, forex trading is taxed in Canada as any other income, as long as it’s above $200. The amount of tax you pay will depend on how much you earn and which method you use to declare your forex trading profits. As always, it’s very important that you keep accurate records and consult a tax professional before making any major decisions about the profitability of your business.
The majority of Canadian forex traders declare their trading profits to be taxed as Capital Gains Tax. Whereas some traders setup limited companies to take their trading profits through.
If you have any questions or queries regarding taxing your forex profits, drop a comment in the section below.