- Understanding a taxation perspective to forex trade in South Africa. If you are a tax trader, this is must read.
Understanding Forex tax in South Africa is crucial as forex is the most liquid market in the world, operating twenty-four hours a day, nearly five and a half days a week.
The subject is critical as South African Rand (ZAR) is one of the top 20 most traded currencies in the world with an annual trading volume of almost USD 70 billion in 2016. This is also considering that the daily turnover of forex trading in South Africa was estimated to be around USD 19.1 billion per day in 2017.
Many South Africans don’t have sufficient knowledge regarding their tax obligations if they exchange foreign currencies.
Understanding Forex Tax in South Africa
Forex (also known as foreign exchange or FX trading), is the conversion of one currency into another.
It involves speculating on the rise and fall of currencies to make a profit. South Africans can legally trade in the foreign exchange market via any FSCA-regulated forex broker authorized for offering Derivative instruments to traders in South Africa.
The forex market is operated by an international network of banks, spread across four main forex trading centers in different time zones: London, New York, Sydney, and Tokyo.
This market determines foreign exchange rates for every currency. Forex trading takes place directly between two parties, in an over-the-counter (OTC) market.
The market runs through financial institutions and operates on various levels.
Behind the scenes, banks become a smaller number of financial firms called “dealers”, who engage in large quantities of foreign exchange trading.
Types of forex market
1. Spot forex market: This is the physical exchange of a currency pair, which usually occurs at the exact point that the trade is finalized or within a brief period.
2. Forward forex market: This is when there is an agreement (contract) to buy or sell a set amount of a currency at a stipulated price, to be finalized at a set date in the future.
3. Future forex market: In this type of forex market, there is an agreement (contract) to buy or sell a set amount of a given currency at a set price and date in the future. The difference between the Forward and Future forex market is that a Futures contract is legally binding.
Since Forex trading usually has to do with selling one currency to buy another, it is always quoted in pairs.
The price of a forex pair is the amount that one unit of the base currency is worth in the quote currency.
Currencies in the pair are usually listed as a three-letter code, which is created using two letters that represent the name of the region, and one representing the name of the currency itself.
For example, GBP/USD is a currency pair that has to do with buying the Great British pound and selling the US dollar.
What is a base and quote currency?
- A base currency is the first currency that is listed in a forex pair.
- A quote currency is the second currency listed.
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Categories of Pairs
1. Major pairs: These are the seven currencies that form 80% of global forex trading and they include EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and AUD/USD.
2. Minor pairs: These are the less frequently traded ones and they often feature major currencies against each other instead of the US dollar. They are EUR/GBP, EUR/CHF, and GBP/JPY.
3. Exotics: This is a major currency against one from an emerging economy, and it includes USD/PLN, GBP/MXN, and EUR/CZK.
4. Regional pairs: These are pairs categorized by region. E.g. Scandinavia or Australasia. It includes EUR/NOK, AUD/NZD, and AUD/SGD.
Taxation in Forex Trading
One of the many misconceptions when it comes to taxation in Forex trading is that many investors think that their offshore trading accounts give them tax-free gains.
In reality, income attained in an offshore trading account by residents is liable to normal taxable treatment and is expected to be reported in South African Rand.
In South Africa, taxpayers must include all of their foreign income, regardless of how small it is, when filing their tax return.
There will be no Pay As You Earn (PAYE) withholding on the money one receives, so this is just a way of settling one’s yearly tax bill.
The words “trading” and “income” are crucial in deducing whether or not Forex trading is taxable.
That is because these words suggest that the investor aims to trade for profit, therefore, any gain made will be liable to income tax at his marginal tax rate.
Now that it has been established that the income generated from Forex trading is just like any other income earned by taxpayers, it can be said that tax deduction is a must.
In the case of citizens who are leaving the country, it is important to follow the right emigration procedures before doing so, to avoid getting taxed twice.
If they don’t handle this the right way, they might end up getting taxed once in the country that they’ve moved to and once in South Africa.
When declaring one’s Forex income, one’s currency gains or losses would be documented under “foreign revenue” or “business/trading,” depending on the context.
To summarize understanding forex tax in South Africa, the profit gotten from Forex trading is just as liable to taxation as any other income generated by South Africans.
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