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Reporting FOREX profits and losses depends on if it is an over-the-counter trade or a currency future contract. Investors can trade on the changes in foreign currency value through a FOREX account.

In FOREX trading, currency is traded in pairs. Commonly traded currencies include the euro, the British pound, the Japanese yen and the American, Canadian and Australian dollars. A pip is usually equal to 0. The value of the pip in a FOREX trade depends upon the size of the trade, the currency pair being traded and the exchange rate.

USD and Canadian CAD dollars that closed at 20 pips with an exchange rate of 1. To find the profit, first find the CAD pip total by multiplying 0. The CAD pips are divided by the exchange rate to give the USD pip, which in this case would be 9.

By default, retail FOREX traders fall under Section , which covers short-term foreign exchange contracts like spot FOREX trades. Section taxes FOREX gains and losses like ordinary income, which is at a higher rate than the capital gains tax for most earners.

Section gains or losses are reported on Form An investor can elect to be taxed under Section , which is primarily for futures contracts and will allow investors to claim some capital gains deductions on profit or losses.

Gains on investments held for less than one year are considered ordinary income, while gains on investments held longer than one year are taxed at a lower rate of 15 percent in For the highest income bracket in , this comes to a tax rate of about 28 percent, according to the Green Trader Tax website.

Capital gains and losses are reported on IRS Forms and on Schedule D.

Terry Lane has been a journalist and writer since Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.

This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above. Skip to main content. FOREX and Pips In FOREX trading, currency is traded in pairs. Finding Profits from Pips The value of the pip in a FOREX trade depends upon the size of the trade, the currency pair being traded and the exchange rate.

Spot FOREX Trade Taxes By default, retail FOREX traders fall under Section , which covers short-term foreign exchange contracts like spot FOREX trades.

Futures FOREX Trade Tax An investor can elect to be taxed under Section , which is primarily for futures contracts and will allow investors to claim some capital gains deductions on profit or losses. References 4 Green Trader Tax: Tax Treatment -- Securities, Futures, FOREX, ETFs and More Oanda: What are Pips in Forex Internal Revenue Service: Sales and Trades of Investment Property ForexOptions: Taxation of Foreign Currency Trading Demystified. Photo Credits Digital Vision.

About the Author Terry Lane has been a journalist and writer since Recommended Articles How to Determine Capital Loss From Stocks in the Short-Term Vs.

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