As Benjamin Franklin famously observed, death and taxes are the only two certainties in life. So, when you earn from forex trading, surely the taxman won’t be far behind. Learning the ropes in the volatile currency market can be difficult. As can be understanding about the forward and futures market, options and swaps. Taxation on this income is no mean feat either!
However, here we simplify the tax implications on forex trading for your easy understanding.
Two broad types
Two types of taxes get attracted when you trade in forex – direct and indirect tax. Indirect tax is applied on the forex transaction, not the income or profit on it. Goods and Service Tax and/or Securities Transaction Tax is charged on the forex amount. However, let’s find out what is the income tax implication on the forex transaction.
Income Tax implication
If the person is in the business of forex trading, income arising out of it will be treated as business income. For any other forex trader, the income made from forex trading will be treated as Income from other sources. The taxation will be as per the tax rate applicable for the person.
The taxation would also be affected by the nature of the forex business. Forex trading may be done to hedge business risks. In such cases, income from forex trading is your business income. However, regular forex trading done without any intention of taking delivery of the currency may get classified as a speculative income. It gets added to the non-speculative income and is taxed as per the applicable rates.
However, when classified as speculative income, the set-off of forex trading losses would have to be done against speculative profits only. Further, this loss can be carried forward for four years only.
This, in brief, is the probable tax implications that can arise out of forex trading.
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