Hi, Sorry if this sounds like a silly question and please correct me where I'm wrong. Say I am trading a foreign currency as the base currency and my home currency as the quote currency, so for example, GBP/USD. If I short this pair, I end up with more USD. If I go long, I end up with more GBP. I need to pay taxes in USD. It seems kind of silly to have to convert my GBP at the end of the year in order to pay taxes in USD so the question I'm asking is do people set up their trading systems so they are only making USD from their trades?
Assuming you are a US citizen, you don't pay taxes on anything until you have a taxable event (like anytime you sell a foreign stock or you sell GBP). If you are saying that in order to pay your taxes, you have to have enough USD on hand to do so, then you are correct. If you had all your free cash in GBP near tax time, then you would have to liquidate some into USD to pay your taxes. But then this transaction (assuming it occurs in 2018), would be a 2018 taxable event, not 2017. Hopefully, I am making some sense. I am not sure if you can declare mark-to-market on currencies trading, but if you can and if you did, then this changes things.
Thank you. Yes, this makes sense. So as a forex trader, do you have a smattering of all your currencies lying around? This seems unclean given that I don't really care about any of those currencies, but only my home currency. I guess I would consider them "surplus inventory". OK, so bottom line, I need to have enough USD around to pay my taxes and I'll just have a potential truckload of other currencies lying around with which I'll do nothing except trade. I wish there was a book about this stuff I could read.
Well presumably you would only be long/short a foreign currency if you wanted that position to be active. If you didn't, you can convert everything to USD at a moment's notice. This solves the "smattering of currencies lying around" problem. I guess I do not really understand why you would have currency positions lying around if you didn't want those positions in the first place.
OK, say I short USD vs JPY at the initial rate of $1 = 100Y. My account now has 100Y. When I exit the short, the rate is $1 = 90Y. My account now has $1 and 10Y. Are you saying I should convert the 10Y immediately so my account now has $1.01? This makes sense but I wonder if I'm being obtuse about something.
I guess the answer to my dumbass question is when exiting the short, convert the entire 100Y to USD. I'm an idiot.
Hi Nooby. You won't end up with more of one or less of another currency, because you are neither buying nor selling. When you "buy" Eur/Usd, you are effectively betting that the euro will strengthen against the dollar. When the bet ends, I.e. you close the trade, any gains/losses are reflected in your account, in the currency you have chosen to use for your account.
try trading CME currency futures as an alternative and see if it works for you. your gains or losses are always reflected in usd. Keep in mind this only works if you hold short term not necessarily 6 months or a year.
I'm not seeing this. I'm trading a USD/Other pair and I have Other currency in my account from a trade similar to the yen trade I described above. I must be missing something.