Forex and Taxes for new traders

This is the another post of the series: How to build your own algotrading platform.

Update: The Machine Learning post is going to be epic but it takes so much time to make the code presentable. Bear with me, cool things are coming (as you've read at the newsletter)

Disclaimer: THIS IS NOT TAX ADVICE.

What is really surprising is that the majority of the requests in the newsletter are:

  1. Use tools to assist Trading
  2. Machine Learning to optimize trades
  3. Taxes

The first two, I can understand. Everybody wants to be a better trader. I get it. But taxes? TAXES?

This is your lucky day. Forex taxes are super easy. Seriously. By default (this is called Section 988), all your losses are going to offset your income taxes without the 3k limit per year. This is much better than stock trading where losses offset your capital gains.

But what happens to gains? WHY DO YOU CARE? WHY? The majority of the Forex traders lose money (I call it "paying tuition") the first year(s), so you are better off keeping it simple until you have a proven and consistent strategy.

Having said that, if you actually make a profit, you are taxed at the short-term capital gain (sometimes up to 40%). The solutions to when you start making money are:

  1. Opting out of Section 988 and get taxed under Section 1256 where 60% of profits are taxed as long term capital gains and 40% as short term (but now losses cannot offset your income). This is very good when you make money, very bad when you don't.
  2. Start an LLC

For people that just started experimenting with Forex and algotrading, I always suggest them to stay with Section 988 (the default) and when they start making some money (consistently) or they want to go full time, talk to me :) Seriously, there are so many things that you will start doing differently when you go from the "hobby" stage to "second income" to "full-time job" that there is no reason to over-optimize this.

Coming up next: Machine Learning Gone Wild!

If you have more feedback, ping me at jonromero or signup to the newsletter.

Legal outro. This is an engineering tutorial on how to build an algotrading platform for experimentation and FUN. Any suggestions here are not financial advices. If you lose any (or all) you money because you followed any trading advices or deployed this system in production, you cannot blame this random blog (and/or me). Enjoy at your own risk.