The American income tax system requires that all income over $600 in a given calendar year must be reported on income taxes. It doesn’t matter if this money is earned at a job, given as a gift, or generated through smart binary options trading – it all counts as income, and therefore the IRS requires that it be reported. Taxes on this money must be paid depending on the state tax laws of your home, as well as on the federal level.
If you’re a dedicated trader, it’s probably a good idea to employ an accountant. Keeping up with the constantly-changing laws that govern income tax can be a chore, and the more money you make at trading, the more rigorous your filing will be. But whether you plan to do your own taxes, or you hire a professional, it’s still a good idea to understand the basics of taxes for binary options traders in the USA…
There are several ways to report the income created by binary options trading. The popular category is short term gains. You’re reporting income that has been in your possession only for the calendar year, making it short term. And the income isn’t your primary source of income, making it a “gain” rather than an income filing. For this type of reporting, a 1040D form is used to file. Remember, any income that is more than $600 over the course of a single calendar year must be reported.
The next tax category that binary options trading income can be reported under is “general income”. This is for traders who earn their primary living through binary options trading. If trading is your business, and pays most of your bills, this is the category you should choose when filing your taxes. One big draw for those reporting under this category is the ability to deduct expenses. Business expenses like your trading platform, your computer, or any educational courses you took can all be deducted. There may also be opportunity to deduct trading losses. All deductions lower how much you’ll pay in overall income taxes.
Finally, some brokers offer a tax service for traders that acts almost like a standard job. The broker will deduct taxes from every earning made throughout the year, and pay it directly to the IRS on your behalf. At the end of the year, you will report your earnings, and show that your tax obligation on these earnings has already been paid.
This is a great option for investors who want to focus on their binary options trading, rather than on the status of their taxes. If you don’t use this option, your entire tax payment will be due at one time, and that can be difficult to predict. If you set aside too little money throughout the year to pay the taxes, you’ll be scrambling to pay the remainder before you incur fines or liens. Some tax crimes can even lead to prison. If automatic payment is available through your broker, take advantage of this service in order to keep your finances in good shape.
Don’t discount the importance of a good accountant if you don’t choose the automatic payments. Federal taxes and local state taxes will both have to be paid, and some income may even be subjected to local county or city tax. Pay close attention to local laws so you don’t end up paying more than you had to in fines.
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