Hi, I am a US citizen living in China. I want to minimize the tax on futures trading profits. Because I live outside the US, I am exempt up to 80k. Is it possible to distribute the current year profit to prior years. I think this can be done for the future years, but not sure about the past. Also any other ideas to minimize the tax? Thanks, svr
Not 100% sure but I believe the 80k exemption only applied to earned income (trading income is capital gains, not earned)
^^ This is true. Income from futures is capital gains, and the foreign tax credit and $85,700 foreign earned income exclusion don't apply. Sorry. If you have earned income, that is when you can carry back 1 year and then forward 10 years (for foreign FTCs unused in the current year). If you have long-term capital assets that you could sell at a loss, netting the long-term capital loss and short-term capital gain could get you beneficial tax treatment, but it is fairly complicated to compute and most likely not what you are interested in doing. I'm not sure if you've lived overseas very long, but the income exemption is called the 'foreign earned income exclusion' and clearly is only for earned income. It applies to "personal services rendered in a foreign country" and you must either be a citizen or be outside the US for 330 days during any 12 month period. The limit is $85,700 for 2007.
Hi, Thanks for the replies. Further question: Is it possible to form a company that trades futures with me as an employee and the company to pay me? SVR
^^ If trading futures was one of the main functions of the business, it would then be considered ordinary income for the business, and would be subject to about the same tax rate as short-term capital gains for individuals (but it really depends on the type of company, LP, LLC, C-corp., etc.). It probably would not help you much, but I'm no expert in this area of tax. What it sounds like you would need is a tax planner who specializes in investment companies. I audit them, but I'm less experienced with the tax aspect. I would think that if there were real benefits, many people would have formed LLCs or companies to trade through. But I don't know many people who do this.
I have never heard that the foreign tax credit was unavailable for foreign taxes related to capital gain income and I cannot find a reference for that. I think it is likely, though, that many foreign countries do not impose taxes on U. S. citizens or residents engaging in securities transactions through a U. S. broker. MSS
He is earning the income through a US broker and is still liable for US capital gains, regardless of how much time he spends in China. ACC is correct regarding the $85,700 foreign earned income exclusion. Trading income is not ordinary income, and is technically being earned in The US, not China. There are a few tidbits on this old thread. http://www.elitetrader.com/vb/showthread.php?s=&threadid=53559
Before posting, just to make sure, I grabbed my 2007 tax text and looked it up, and the foreign tax credit applies to earned income. Unless the authors used incorrect wording (unlikely but possible) then maybe I was wrong.
I just went ahead and looked at Section 27, and sure enough, the wording in the Code says 27(a) FOREIGN TAX CREDIT. --The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax imposed by this chapter to the extent provided in section 901. So apparently the authors of my most recent text got lazy with their wording. But like Surdo said, foreign countries may not charge taxes if a US broker is used. I don't have experience with it though so probably the best thing to do is talk to your broker. He or she probably has encountered a similar situation before. In case anyone wants to read the entire thing (who wouldn't?), the qualifications and calculation procedure for the credit aren't in Section 27, but Sections 901-908.