Yes, taxes rank as one of the most hated things in life, but there’s really no getting out of paying. For US citizens, if you earn more than $600 in a fiscal year, then you owe the government a cut of your earnings. That applies to all sources of income, whether you’re sweating in a mechanic’s shop or making money through binary options trading. How are taxes for binary options traders assessed, though? What are you looking at in terms of tax liability when everything is said and done?
How to Report Your Earnings
Hopefully, you’ll be earning money with binary trading, rather than spending it without any return. That income must be reported each year on your taxes. You have two choices as to how you’ll report your earnings to the IRS – you can opt to call it general income, or you can classify it as capital gains. However, it’s better for compliance with the IRS to report any profit from the sale or trade of an asset as capital gains (short-term gains). Your earnings will need to be listed on Form 1040 D.
With that being said, if you’re a full-time trader, your income will need to be reported under general income rather than capital gains. That offers something of a tax break depending on how much you earn, of course. Make sure to clearly state where the income came from, and the total amount you earned from your trading.
Taxes for binary options traders working with a broker are actually a little easier. The broker is required by law to report your earnings to the IRS. In fact, your taxes are deducted from each trade as you go, so there’s little worry that you’ll be hit with a huge tax bill at the end of the year. It’s closer to the way taxes are taken out of a weekly paycheck than the way a small business owner files his or her taxes each year.
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If you’re working with a regulated broker and taxes are being taken out of each trade, there’s a good chance that you won’t have to pay the government anything at the end of the year (however, that’s not a guarantee). If you’re not having taxes taken out from every trade, you’ll need to assess your tax debt and pay the government at the end of the year. You will also be responsible for paying the state government if your state assesses income tax.
Now, it might be tempting not to report your earnings – taxes for binary options traders can be high if you’ve managed to make savvy trades. However, understand that this is not an option. Sure, you can omit it from your return, but the IRS is eventually going to catch up with you, and you can bet that you’ll be in some serious hot water if they find you’ve been avoiding paying your taxes. Not reporting your income is a crime.
Taxes for binary options traders are very similar to the taxes you’ll pay on any other income, particularly if you’re a full-time trader. However, even part-time binary options traders need to ensure they’re accurately reporting their income to the IRS each year to avoid serious fines and penalties.