Introduction
Handling taxes in any country can be difficult for a forex trader. This is because many people start trading without considering taxes. It should be clear to us that filing taxes is a requirement for earning income, regardless of our methods.
The Financial Sector Conduct Authority (FSCA) oversees currency trading in South Africa. The FSCA guarantees fair and open market operations. If you trade forex, you must follow the tax regulations established by the South African Revenue Service (SARS), which demand that you pay taxes on the profits you make from your trades.
This article will teach you how to manage your forex trading taxes, the tax implications of trading on the forex market, and how to lawfully pay less in taxes in South Africa as a forex trader.
How to pay tax as a forex trader?
There are basically two options. Keep in mind that there is no right or wrong path to choose, but it all depends on your trading goals.
Engaging in independent trading
It suggests that you are managing a small business and only dealing with yourself. If you are a forex trader and have consistently generated over R10,000 for the past six months, then you most definitely qualify for tax. However, it's imperative to understand that working for oneself will be significantly more expensive than working for a company owner.
Engaging in business as an owner
Any profits you make as a forex trader go into your business account if you run a business in addition to trading, such as a consultancy or training firm.
As a result, there is a difference between working for yourself and trading as a business owner. The self-employed individual deposits their earnings into their personal account. Nonetheless, there are several benefits that come with being a registered business owner. The money is sent straight to your business bank account; from which you can move money to your personal account to pay for any additional expenses
How much tax do forex traders pay in South Africa?
Residents of South Africa who trade forex are subject to different tax rates based on their income and the kind of trades they will be doing. A trader is exempt from paying taxes on their forex trading profits if their annual income is less than R79,000. On the other hand, traders who make more than R79,000 annually are subject to a tax system that ranges from 18% to 45%.
Remember that a forex trader can deduct their trading losses from their taxable income during the tax year to reduce their tax obligation. However, due to specific SARS constraints, the amount of your losses that you can deduct remains unclear. Nonetheless, it's crucial for a trader to constantly maintain a record of their transactions, including any gains and losses. Maintaining the documentation can also be quite beneficial in ensuring that you pay the right amount of taxes.
As a Forex trader, you may also be required to pay additional taxes, such as value-added or capital gain taxes. In South Africa, the capital gains tax rate is 18%. The profits you make from selling assets, including forex trading investments, are subject to this tax. On the other hand, a value-added tax imposes a tax on the added value of goods or services.
Since they are exempt from value-added taxes, forex traders shouldn't be concerned about them. Nonetheless, a small number of dealers may have to pay a value-added tax on specific costs such as software and training programs.
How to legally pay less taxes?
Knowing your ratio is the first step in tax preparation. It entails knowing how much money you need to set aside in order to pay taxes down the road.
You must have a business in order to possibly lower your taxes on forex trading. Your firm's involvement in forex trading may necessitate the provision of coaching or the creation of web material, both of which incur significant costs. When discussing taxes, expenses are a crucial topic. As a result, you must conduct yourself like a business.
If you are a trader and consistently profitable, we advise you to launch a coaching or consulting company. If you're a trader, the primary incentive to launch a business is the tax benefit. At this stage, if you identify yourself as a consultant or coach, you can begin charging for your services. Any purchases you make for your coaching firm are considered business costs, and you can write off amounts that would otherwise be subject to taxation. As a result, all of these expenses benefit you in terms of your annual tax liability.
It's also critical to comprehend which expenses are tax-deductible and which are not. You will need to do your own research on tax deductions and deductibility. Nonetheless, experts typically recommend making tax-deductible purchases. It indicates that you are not squandering funds on non-tax-deductible expenses.
For instance, tax deductions are available for education and personal growth. In order to learn more about trading, it is wise to invest in your education or skill development as a trader. Eventually, you will be able to deduct those costs from your taxes. This is where you need to have an owner's mindset. If you must spend money, make sure it is for something that your business is responsible for. Therefore, invest in projects that propel your company forward and ensure that your out-of-pocket expenses are deductible as tax.
Regarding the amount of money you ought to set aside, let's take an example where you receive a R10,000 withdrawal from your funded account. First, you will take off 25% and set it aside for taxes. No matter how much money you get, you will always have to go through this process, which entails removing 25% of your income on average and setting it aside for taxes.
Obtaining a business bank account is another crucial step. Verify the reserves in your business bank account. This allows you to set aside funds in various reserve accounts. You will have three accounts: one for company savings, one for business investments, and one for tax reserves. They're all located in your primary business account. You'll have your regular balance, which covers your business's expenses.
You therefore maintain sufficient funds in your business checking account to cover all of your company's monthly expenses. Your tax reserve account has money set aside specifically for taxes. The money in your business investment account is for possibilities you see to invest in your education or skill development as a trader and business owner, and the money in your savings account reserves is for emergencies when business slows down.
You might be wondering when you'll receive your payment. You are able to withdraw as an owner here at any time. Therefore, you can simply pay yourself whenever you need money for personal expenses by depositing it from your business checking account into your personal bank account.
Tips to manage your forex trading taxes
As we stated from the outset, managing taxes as a forex trader can be difficult, but you can save a great deal of money and effort if you follow the rules and ensure that everything is done right. Let’s have a look at some professional tips to help make things simpler and easier when managing your forex trading taxes.
Have a comprehensive comprehension of tax principles and mechanisms.
Prior to starting a career as a forex trader, it is critical to have a comprehensive understanding of the tax implications of trading. In the future, this method will be highly effective in avoiding avoidable issues with the South African Revenue Service (SARS).
It is necessary for you to enrol as a provisional taxpayer.
SARS requires South African traders to register as provisional taxpayers. This strategy will serve as a mechanism for allocating the tax burden for a specific tax year.
Keep accurate records
Completing your tax returns requires you to have comprehensive and accurate records of your income and expenses. This will guarantee that you only pay tax on what you actually earn and simplify the process of calculating your taxable income. Maintain a thorough record of all your business calls and travels.
Maximise deductions and claim expenses
You are possible to lower your tax liability by taking advantage of a number of deductions and allowances. To optimise tax savings, compile a comprehensive inventory of qualifying expenditures, such as telephone expenses, internet charges, and broker fees, and subtract these costs from your taxable income.
Keep separate bank accounts for personal and business use. Make sure you deduct personal expenses from your business account and give yourself a salary. You can claim for taking a client out to dinner, but not for a date night with your significant other, since SARS closely examines entertainment expenses.
To be able to claim all of your expenses when filing your taxes, make sure you save your invoices and receipts for every purchase.
Conclusion
To summarize, determining tax obligations as a forex trader, particularly in South Africa, might be rather challenging, but it is essential to ensure accuracy. Having a thorough understanding of the regulations and making intelligent decisions can result in financial savings and prevent any legal issues with the tax authorities.
Whether you operate independently or within a company entity, it is crucial to have a comprehensive awareness of tax regulations. By diligently monitoring your expenditures and maintaining meticulous records, you can ensure accurate tax payments and prevent any potential complications in the future. By following these measures, you can effectively manage your cash and maximise your trade prospects.
