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Legal and Tax Considerations for Traders and Investors

Contributed by IG
July 9, 2018

The world of trading is often a complex one, filled with a myriad of different investment instruments and a wealth of global markets for investors to choose from. As such, there are many legal and tax considerations which all traders should know about in order to trade comfortably and safe in the knowledge that their investments are sound.

Whether looking at a spread on forex or purchasing stocks and shares, each trade should be conducted with full knowledge of how it can be taxed as well as the legal requirements involved. Here are some considerations which every trader/investor should make.

IRS 1256 Contract

The IRS (Internal Revenue Service) uses this term to refer to some of the most popular trading instruments used by investors. It covers any regulated futures contract, foreign currency contract, non-equity option or dealer securities futures contract. In the past, many traders used to bend tax rules by hedging their short term futures contracts for the purposes of qualifying for long term capital gains tax (which is a lower rate than short term capital gains tax).

This tax code has made the previously mentioned trading contracts more viable for traders, as they are marked to market at the end of the tax year and treated as closed.

Capital Gains

One of the most crucial considerations for any trader is capital gains tax, and how much they will have to pay from their overall profit. It can be fairly complex, given that those in income brackets will pay different amounts on their capital gains.

How long their assets have been held for also makes a huge difference. For example, someone earning between $9526 and $38600 would be in the 12% tax bracket, and pay 12% on profits from an asset held less than a year, but nothing on the profits from an asset held for more than a year.

Day Trading

Many traders trade either part time or even as a hobby, in which case they are likely to have to pay capital gains tax on their profits. Some, however, are full time day traders, who treat trading as their career. In each of these cases, taxation can become a little tricky, given that they may have to pay a different type of tax depending on their level of trading as well as the profits they make.

As such, it is important to do some research and find out which different taxes will have to be paid as a day trader, and how this might affect overall profitability (especially for those who are looking to transition to day trading).

Investing in Businesses

Those investors who have enough spare money to buy a stake in a business and provide it with the initial funding it needs will certainly have their work cut out when it comes to legality and ensuring everything is legitimate.

Most investors will want a legal and accounting expert to help set the foundations for the agreement/contract between them and the business owners, which will help avoid disputes and potential legal action in the future (over things like money owed and profit transparency).

Trading and investing can be a very lucrative pursuit, but it is essential to get legal and tax requirements sorted as soon as possible. This way, investors can ensure that they are able to invest without the worry of complications further down the line.


Tags: tax | trade | forex | business | investment | accounting | currency | Capital Gains | Invest



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