Forex and Taxes – Compendium
FOREX profits and taxes
In 2005, the Polish Securities and Exchange Commission issued an interpretation of the regulations amending the Law on Public Trading in Securities , in which it recognized that forex transactions are a type of transaction in financial derivatives and are subject to the same tax rules as capital gains . These incomes are not subject to the flat-rate 19% income tax, so taxpayers must report them on their PIT-38 tax return and pay the appropriate tax. The growing popularity of the forex market has caused tax issues on this type of income to be a concern for a growing number of investors. Internet forums are full of threads about taxation, but the information provided there is often contradictory and inaccurate. In this article, I will attempt to systematize taxpayers’ obligations related to income earned on the forex market.
Depending on whether our investment account is managed by a Polish or foreign broker, the process of settling Forex income may vary. In short, it’s as follows:
Tax with a Polish broker
- until February 28, 2019 we receive PIT-8c from our Polish broker
- based on PIT-8c, we settle the tax return PIT-38
- in item 19 of PIT-38 we show income from Forex
- in item 20 of PIT-38 we show the costs of obtaining income from Forex
- the difference between revenue and costs gives us profit or loss
- we charge 19% tax on income
- We submit the return to the Tax Office by April 30, 2019
Tax with a foreign broker
- a foreign broker is NOT obliged to issue us with a PIT-8c
- We calculate the amount of income and costs from FOREX ourselves
- We convert the obtained amounts into PLN according to the average exchange rate announced by the National Bank of Poland
- in item 19 of PIT-38 we show income from Forex
- in item 20 of PIT-38 we show the costs of obtaining income from Forex
- the difference between revenue and costs gives us profit or loss
- we charge 19% tax on income
- We submit the return to the Tax Office by April 30, 2019
- we prepare documents confirming the method of calculating revenue and costs
Tax with a Polish broker – details
As seen above, settling income earned through an account maintained by a Polish broker shouldn’t pose any major difficulties. This is done similarly to personal income tax and involves entering the information from the PIT-8c form into the appropriate fields of the tax return . However, it’s worth remembering that if you earn income from the Forex market, you must complete the PIT-38 form . The return must be submitted by April 30th of the current year, and the tax due must also be paid by that date . It’s worth taking the time to verify the information provided by the broker, as the taxpayer is responsible for any incorrect tax settlements.
Tax calculation with a foreign broker – details
Settling income earned through a foreign broker is a bit more complicated and is the same whether the broker is from Australia or the nearby United Kingdom . Failure to provide PIT-8c information does not exempt us from tax liability and means we must calculate our income and expenses ourselves . It’s worth remembering a few important rules, as the interpretation of the regulations in this area is not clear.
The Personal Income Tax Act states that income from the Forex market is the difference between the sum of revenues earned from the sale of derivative financial instruments and from the exercise of rights arising therefrom, and the costs of obtaining revenues (Art. 30b, sec. 2, item 3). Another article of the same Act clarifies that the costs of obtaining revenues may include all costs incurred to generate revenues or maintain current sources of revenues, with the exception of the costs listed in Article 23 (Art. 22, sec. 1).
The most important cost of earning income from an investor’s perspective is losing trades . Additionally, these costs include broker commissions paid for Forex trading, as well as the costs of maintaining a currency account if it is used solely for Forex trading.
To calculate your income, you need a full transaction summary for the previous year . Then, you convert each closed position from your account currency to PLN using the National Bank of Poland exchange rate from the business day preceding the transaction closing date. In short, you convert each profit and loss to PLN . More active investors will find a spreadsheet helpful.
Paradoxically, exchange rate differences can result in tax being charged after converting a transaction to PLN, even if we recorded a loss in our foreign currency account. The opposite situation is also possible: we recorded a profit in our foreign currency account, but after converting to PLN, we incur a loss and don’t have to pay tax.
Forex Tax Calculator
To make it easier for our readers to quickly calculate the tax on foreign Forex/CFD brokers, we have prepared a tax calculator that calculates its amount based on the statement generated from the MT4, MT5 or cTrader platforms.
Tax on income earned in tax havens (Annex PIT/ZG)
Thanks to international agreements protecting taxpayers from double taxation, income from Forex transactions is subject to tax only in the taxpayer’s place of residence. However, there are exceptions in certain situations. Under the agreement signed with the US, a taxpayer may also be subject to taxation in the United States if they have been in the country for more than 183 days. Double taxation can also affect us if our broker is based in Malta, the Bahamas, or another country considered a tax haven (Poland has not signed treaties with these countries protecting citizens from double taxation).
IN in such a situation, the PIT/ZG attachment will be helpful, in which we report income earned abroad and taxes paid there. Income from the FOREX market obtained outside the country we report in part C3 of the annex, item 32, while In item 33 we enter the tax on this income paid abroad. The amount from item 32 PIT/ZG must be included in PIT-38 in item 23 or 24 as other revenues. In addition, in item 33 of the PIT-38 declaration we show the tax that we paid abroad because we can deduct it from the tax we have to pay pay in our country.
Obligation to file a return even if you suffer a loss
Under the Personal Income Tax Act, every taxpayer earning income from capital gains is required to file a tax return detailing the amount of income earned or losses incurred. The deadline for filing the return is traditionally April 30th. Therefore, a tax return is necessary regardless of whether we have generated income or suffered a loss.
It’s also worth noting that if a loss is incurred in a given tax year, the taxpayer can deduct that loss from their stock market or forex income in the following five years . It’s important to remember that the total deduction cannot exceed 50% of the recorded loss.
Please do not consider the above text as tax advice. It is best to seek the advice of a tax advisor.
