Forex Trading Tax in Australia

How is forex trading taxed in Australia?

Forex trading tax in Australia is income tax on gains and losses from currency trading, which retail traders here generally do through CFDs (margin FX). Under the ATO’s ruling TR 2005/15, a gain from a CFD entered into as part of a business or with a profit-making purpose is assessable income, and a matching loss is deductible. The ATO expects CFD gains and losses to be on revenue account most often. A CFD traded for recreation by gambling is the exception, giving no assessable gain and no deductible loss.

Are you a trader or an investor?

Trader or investor status depends on whether you are carrying on a business, judged by factors the courts have taken into account. The ATO lists them on its Share investing versus share trading page, which is written about shares. The ATO weighs the nature and purpose of the activities, their repetition, volume and regularity, business-like organisation, and the amount of capital invested. An intention to make a profit is not enough on its own; a business plan, research and record keeping count toward trader status. A trader’s gains are ordinary income, with losses and costs deductible in the year incurred, while an investor’s profits are subject to capital gains tax.

CFDs sit differently. A CFD gain is on revenue account where there is a business, a commercial transaction with a profit-making purpose, or a profit-making undertaking or scheme, so most CFD gains are income either way. For anyone forex trading in Australia, I would treat the business question as mattering most for how your losses can be used.

How the ATO taxes CFD gains and losses

Under TR 2005/15 the ATO’s view is that a CFD gain is assessable under section 6-5 of the Income Tax Assessment Act 1997 when the CFD forms part of a business or sits in a commercial transaction with a profit-making purpose, with the matching loss deductible under section 8-1. A CFD entered into as a profit-making undertaking or scheme gives an assessable gain under section 15-15 and a deductible loss under section 25-40. A gambling CFD entered into for recreation gives neither.

The ATO expects CFD gains and losses to be on revenue account most often. It treats a gambling purpose as unusual and calls one that is neither profit-making nor recreational “exceedingly unlikely”, which I read as the ATO saying capital treatment of a CFD will be rare. Paragraph 17’s indicators of a business are systematic, organised and businesslike conduct, repetition and regularity, the scale of the activity, links to other business activities, the purpose, and the degree of skill.

What happens to trading losses?

A CFD loss is deductible wherever a gain would be assessable, and a recreational gambling CFD gives no deductible loss. An investor’s capital loss offsets capital gains only, and unused losses carry forward. The ATO says capital losses built up as an investor cannot be converted into revenue losses after a switch to trading, a trap I would plan around.

Where CFDs form a trading business, the ATO’s general non-commercial loss rules decide whether a loss can reduce other income such as your salary in the same year. They need income under $250,000 plus one of four tests: assessable income of at least $20,000, a profit in three of the past five years, real property of at least $500,000 used in the activity, or other assets of at least $100,000 used in it. Otherwise the loss is deferred unless the Commissioner’s discretion applies. These are general business rules, not written for traders.

Records to keep and converting to Australian dollars

All foreign income, deductions and foreign tax paid must be converted to Australian dollars before going into your tax return, generally at the rate on the day of the transaction or at an average rate. Since 1 January 2020 the ATO has used Reserve Bank of Australia rates, published in monthly and year-end tables on its foreign exchange rates page. Its foreign income conversion calculator converts at a specific or average rate for 2013-14 to 2025-26, but cannot be used for foreign income from business activities.

A US dollar account reports results in that currency, so each needs converting. The ATO’s general rule is to keep your written evidence for five years from the date you lodge the return, with different periods in limited cases such as a capital gains tax asset, and its investment records guidance lists what was paid, what was received, income received and the expenses of holding the investment. David Levy verifies every published number against source documents, and I would advise any trader to hold each figure in the file traceable to a broker statement.

Worked example: converting trading results to Australian dollars

This example is hypothetical, with invented figures and illustrative rates that are not Reserve Bank rates. It follows a trader whose account is held in US dollars and who closes three currency CFD trades in one income year. Each result is the net figure the broker statement reports, converted at an illustrative AUD/USD rate on the day the trade closed, so you can follow your own conversions the same way: Australian dollars equal US dollars divided by the AUD/USD rate.

The example ends with a net gain of A$815.00, US$521.60 before conversion. Under TR 2005/15, that net gain would be assessable income if the trades were part of a business or had a profit-making purpose, and a net loss would be deductible in the same circumstances. Converting each trade at its own rate is one method, and the ATO also allows an average rate in general. No tax rate or tax payable is shown, because that depends on your whole tax position; I would let a registered tax agent settle the figures.

How GST applies to CFD trading

Under GSTD 2005/3, issued 22 June 2005 and still applying, CFDs are financial supplies when the regulation 40-5.09 conditions are met, and a financial supply is input taxed under section 40-5 of the GST Act. The charges a CFD provider makes, such as the spread, dealing commission, transaction costs and cost of carry, are additional consideration for that financial supply. CFDs are not gambling supplies under section 126-35 of the GST Act. Where a separate intermediary charges you brokerage, the ATO’s ruling GSTR 2002/2 generally treats that brokerage as a taxable supply, while the financial supply itself stays input taxed.