JOHANNESBURG – With many Forex Traders having found themselves on the wrong side of the law when it comes to their obligations to the tax man, FX Magazine took on an assignment to investigate more regarding forex income taxations.
Despite the fact there are few Forex Traders having been found guilty of violating South African tax laws, some have been found guilty and charged for fraud resulting from their profits among other charges.
This magazine made numerous attempts to reach out to the South African Revenue Services (SARS), the South African Institute of Chartered Accountants (SAICA) and the South African Reserve Bank (SARB), some institutions were unable to provide a response in time for publication.
To many, the Forex Trading profession is still clouded with controversy and some still believe it is an illegal form of making money, but the growing numbers suggest a different story.
Following our June report The South African Reserve Bank and SARS froze a multi million rand bank account FX Magazine journalists Takemore Chikwesa and Phumzile Ngcatshe went hunting for answers on whether Forex traders should pay tax, are they liable for failing to disclose their earnings through trading and many tax-related questions.
According to Keith Engel, he is the CEO of the South African Institute of Tax Professionals (SAIT), he stated that a Forex Trader is taxed at normal rates of up to 45%.
“Forex Traders generally make two types of income, commission income, and direct FOREX trading gains and losses. Commission income is taxed at normal rates of up to 45% like all other forms of ordinary income (e.g. salary),” Engel told FX Magazine.
“Forex trading generates gains and losses. A trader of currency is taxed at normal rates (e.g. up to 45%) as like other forms of ordinary income but can offset Forex losses against Forex gains (and other forms of ordinary income). In effect, the tax falls on the net gain (with net losses being deductible).
“The special point of Forex is that there is a deemed sale of all Forex at the taxpayer’s year-end (end of every February for individuals). Therefore, the Forex trader must account for all sales plus al holding held at the end of February. All currency held at the end of February is then matched against the same currency held when acquired during the year (or at the start of the year 1 March if held from the beginning of the year). This year-end currency is then deemed sold to create a further gain or loss,” he said.
Moreover, Engel concluded that all Forex earnings or amount must be declared in the taxpayer’s returns as known as IT12.
“All Forex amounts must be reported in the Taxpayer’s individual tax return (IT12). Failure to report triggers interest and penalties like any other failure to report income. Penalties vary depending on the case but can often be up to 100% of the underlying tax owed,” he concluded.
Speaking to a chartered accountant practicing privately on his own, Johannali Swanepoel from TaxTim South Africa, she said a Forex Trader has an obligation to disclose earnings in line with the laws of that particular country she resides in.
“As a South African resident you are taxed on your worldwide income and as such will need to declare the profits (converted to rand) in your annual tax return. You would also need to pay provisional tax in August and February every year, as your income won’t be subject to PAYE (Pay As You Earn),” Swanepoel told FX Magazine.
“You would be taxed on the profit made if you are trading the forex and not just holding onto it for a few years. The rate at which the profit would be taxed is based on the rest of your income. The profit is added to your other income and then applied against the tax tables to calculate what your tax payable is. You will only pay tax on the income from trading and not from money which just sits in the account earning interest. That interest would be subject to tax, but only if it is greater than R23 800 per year, if you are under 65 and R34 500 for persons over 65 on year-end,” she added.
In addition, the seasoned accountant if a Forex Trader is only using funds or profits from his or her initial investment in the year after the initial investment, then trading may be seen as similar to trading stock in which case the Income Tax Act has specific rules for.
“Your opening and closing balances would be taken into account in calculating your actual profit each year. If however, it is a straight profit that you are using then again whatever new profit you make that year would be seen as taxable in your hands and added to your other income to determine your taxable income,” she continued.
“The trader should be sending an income tax statement detailing the profit earned on the actual trades and the interest earned on the balance in his or her account. This would then be added to a salaried income and the tax payable would be calculated based on the tax tables.
“You will remember as well that you can deduct any other expenses that relate to earning this income, but these expenses must relate to the income (e.g internet fees) and not be of a personal nature. The rule is that all expenses incurred in the production of this income may be deducted.
“To conclude, the Forex Trader must keep a record of all transactions (I would suggest a spreadsheet),” concluded Swanepoel.
Meanwhile, another Chartered Accountant Nico Basson also confirmed that Forex Traders are taxable from their hard-earned profits, clearly stating that Forex Traders are not allowed to claim on forex losses.
“Yes, Forex Traders are required to pay tax. (The guidelines) are stated in the 8th schedule of Income Tax Act and Capital Gains Tax Section 8C,” Basson told FX Magazine.
“Withholding tax (‘WHT’) in other countries or tax retention whereby an income tax is to be paid to the government by the payer of the income rather than the recipient of the income.
“The tax is thus withheld or deducted from the income due to the recipient. Governments use withholding tax (‘WHT’) as a means of to combat evasion and sometimes foist additional withholding tax (‘WHT’) requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common or rife,” he responded.
FSCA declined to comment and referred all the queries to SARS who didnt reply at the time of going to press.