Trading forex with a broker based outside the US opens the door to more markets and strategies. But when tax season rolls around, things can get confusing. Many traders wonder how the IRS treats profits from non-US accounts, what forms to file, and how to avoid costly mistakes. Here’s what you need to know to stay compliant—and keep more of your hard-earned gains.
US Tax Rules Apply Even If You Use a Foreign Broker
If you’re a US taxpayer, your legal obligation to report and pay taxes on worldwide income doesn’t change just because your broker is overseas. The IRS wants their cut—no matter where those profits come from.
Photo by Nataliya Vaitkevich
Foreign brokers are often less involved in US tax reporting than domestic ones, but this doesn’t excuse you from proper filing. You must recognize, calculate, and report all your forex income, regardless of how (or where) you received it.
Tax Treatment: Section 988 vs. Section 1256
IRC Section 988: Ordinary Income
Most spot forex trades fall under Internal Revenue Code (IRC) Section 988. Under these rules:
- All gains and losses are "ordinary": You pay taxes at your regular income tax rate, which can reach up to 37% for higher earners.
- No capital gains benefits: Losses may offset other types of ordinary income, with no $3,000 maximum limit like regular capital losses.
For the average trader, this is the default setup—simple, but often leads to higher tax bills.
IRC Section 1256: The 60/40 Capital Gains Split
If you prefer futures-style tax treatment, you can make a one-time election to have your forex trades taxed under Section 1256. This comes with:
- 60% of your gains treated as long-term capital gains: Usually taxed at a maximum of 20%.
- 40% taxed as short-term capital gains: At your ordinary rate.
This “60/40 split” often results in a lower overall tax rate, especially if you earn most of your income from trading. To take advantage, you must formally elect out of Section 988—preferably with support from a tax advisor.
Key point: This election needs to be in writing before the tax year begins for which you want it to take effect.
Forms and Reporting You Can’t Ignore
Trading with a foreign broker means less built-in US tax reporting. However, you’re still required to submit several important tax forms if you want to be compliant:
- Schedule D and Form 8949: For reporting capital gains or losses from Section 1256 trades.
- Form 1040: The main tax return, which includes line items for "other income" (this is where many Section 988 traders report forex profits).
- Form 8938 (FATCA): Required if you have foreign financial assets exceeding $50,000 (single) or $100,000 (married filing jointly) at any time during the year.
- FBAR/FinCEN Form 114: If your foreign accounts total more than $10,000 at any point, you must file this online form.
These forms often ask for details like peak account value, institution name, and country. Keep meticulous records.
Avoiding Double Taxation and Withholding Surprises
The US taxes your worldwide income, but some countries also tax profits earned from brokers within their borders. To prevent paying taxes twice, the US offers a foreign tax credit—but only if you report everything fully and claim it on your return.
Unlike US brokers, foreign brokers typically don’t withhold taxes for the IRS. You're responsible for making estimated tax payments (if applicable) and full payment at tax time.
How to Track Profits and Stay Organized
Trying to recall your annual trading results from a pile of statements and PDFs is stressful. Use these steps to stay on top of your records:
- Log each trade: Date, type, amount, gain/loss, and the currency pair.
- Convert everything to US dollars: The IRS requires all reporting in USD, so track exchange rates on each trade date.
- Archive all statements and confirmations: Print to PDF or save digital copies.
- Keep proof of your Section 988 or 1256 election (if you make one).
Tip: Use personal finance apps or spreadsheets to automate logging and conversion. It’ll save you headaches at tax time.
Watch Out for Reporting Penalties
Failure to file the right forms or disclose foreign accounts can mean stiff penalties:
- Failure to file FBAR: Up to $10,000 per violation (even for honest mistakes).
- Willful violations: Penalties can jump up to $100,000 or 50% of the account balance per violation.
- Late or missing foreign asset disclosures (Form 8938): $10,000 penalty and more if not corrected.
Ignorance isn’t an accepted excuse. A little prep now prevents a major financial mess later.
Should You Hire a Tax Professional?
The more trades (and foreign accounts) you have, the more complex your taxes become. Many successful forex traders hire a CPA familiar with expat and forex tax rules to catch what DIY software sometimes misses.
Even if you file yourself, it’s smart to get expert help the first year you go global. This ensures you start with the right elections and reporting, setting a solid foundation.
Conclusion
Trading with a non-US forex broker doesn’t get you off the IRS’s radar. You still owe tax on all your profits—and you must report foreign accounts and assets in detail. The way your gains are taxed depends on the type of forex trading, whether you elect Section 988 or 1256, and your overall income.
Keep careful records, file the right forms, and don’t wait until April to figure things out. An organized, informed approach means less stress, fewer penalties, and more cash in your pocket. Ready to take control of your trading taxes? Start organizing your records today and consult a tax pro if the rules look tricky. Your future self will thank you.