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Question
I trade Forex and HFX (High Frequency Trading) & I live In Texas Do i Have to pay taxes on that money? And if so how much? And are forex traders considered self employed? Thanks
Answer

Hi there! Great question. The short answer is yes, you do have to pay tax.

Gains and losses from high frequency trading are treated differently than regular capital gains. Due to the nature of the transactions, gains are categorized as Section 1256 contracts with the IRS and are taxed as 60% long-term, and 40% short-term.

Long-term capital gains receive the favorable capital gains rates that range from 15-20% depending on income. (Most capital gains are taxed at 15%).

Short-term capital gains are taxed at your ordinary income tax rate, which can be as high as 37% depending on your income.

Regarding your self-employment question, the answer is a bit more complicated.

If this is your primary source of income and you devote a substantial amount of time to it, you might be able to categorize yourself as a trader rather than an investor for tax purposes. Traders are self-employed and can report their income on Schedule C and claim deductions.

However, in order to qualify you would need to make the Market-to-Market election using form 475(f), and it needs to be attached to your tax return in the year prior to the year you want to be considered a trader. So if you want to be treated as a trader for 2021, you would have needed to attach the election to your 2020 return and filed it by April 15 (extensions aren’t allowed for this election).

Without this election in effect, you can’t report your gains on Schedule C or claim deductions. Gains will have to be reported on Schedule D subject to the 60/40 split mentioned above.

No answer given yet!

Sarah York, EA

Sarah is a staff writer at Keeper Tax and has her Enrolled Agent license with the IRS. Her work has been featured in Business Insider, Money Under 30, Best Life, GOBankingRates, and Shopify. She has nearly a decade of public accounting experience, and has worked with clients in a wide range of industries, including oil and gas, manufacturing, real estate, wholesale and retail, finance, and ecommerce. Sarah has extensive experience offering strategic tax planning at the state and federal level. During her time in industry, she handled tax returns for C Corps, S corps, partnerships, nonprofits, and sole proprietorships. Sarah is a member of the National Association of Enrolled Agents (NAEA) and maintains her continuing education requirements by completing over 30 hours of tax training every year. In her spare time, she is a devoted cat mom and enjoys hiking, baking, and overwatering her houseplants.

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