The question on whether you should pay tax on the binary options depend on the tax law of your country. I am not an attorney or accountant and not in the position to give you legal advice. I try to give you an idea of what I think you should do with your earnings. Binary options earnings in the UK is grouped under different classes of income. Traders based in India must register for their own companies if they want to report binary options trading as a permanent income source. Traders in Canada can get lesser tax on binary options trading if they become incorporated companies. If you are uncertain whether you should pay tax on binary options, you should check with your government because avoiding to pay tax is a criminal offense in many countries.
What I can tell you is, that offshore brokers (companies that are not registered in your country) are not obliged to report trader activities to other countries. This means that there is a small chances that somebody will report you. However your bank or other legal entities can require information about income from unknown sources. So, in the end it’s better to report everything, especially if you are making a decent income from binary trading.
Binary Options Tax for Traders in the USA
Traders based in the USA are to report their earnings from binary options trading with the IRS (Internal Revenue Service). The amount of tax you pay on the stocks, options and futures is about 25% of your binary options profits. You are to file the income tax if you earn more than $600 from binary options trading within a single calendar year. Serious traders will usually hire an accountant to prepare the taxes for their binary options trading every year.
Filing for Tax with Form 1040D
The Form 1040D can be used to file the tax for short term earnings from binary options since the trading activities occur less than one year. You are to file for the income tax under long term capital gains if you derive the earnings from a long term options with an expiry that last for more than one year. If you rely on binary options trading to make a living, you can report it as a general income. General income means the profits from the trading activity can be gift from another person or profits that you earn as a self employed individual.
State and Federal Tax
There are two types of taxes you need to pay including state and federal taxes. The federal tax on your binary options’ earnings are higher compared to the state tax. You are to state how you receive the income and report all of these sources on your income tax.
Deducting Your Losses to Offset Your Tax
The advantage of filing it under a business such as self employed is that you are allowed to deduct your losses which are seen as the cost of trading. Deducting your losses enables you to get taxed with a lesser amount. Therefore, you should always remember to record down every single transaction including deposits, profits and losses. If necessary, you should save take screenshot of the earnings/losses from your computer. If you get any receipt, make sure it keep it in a safe place for future references.
Keeping Track of All the Profits/Losses
You need to keep a record of your income as the binary options brokers are not required by a law to provide you with the earnings statements. You must keep a copy of the credit card and bank statement as the IRS will perform random check from time to time. If you are not sure what you can deduct from your binary options trading profits, it is recommended that you seek the advice of a tax consultant.
Paying Tax with Tax Declaration Form
Another option is to declare your binary options trading profits by using the tax declaration form. The tax declaration form is provided by the regulated brokers in USA. The broker will submit the tax declaration form on your behalf to the IRS. The tax will be automatically deducted from your binary options trading profits. If you choose this method to pay the tax, you will have to keep paying the tax throughout the entire year instead of one lump sum. At the end of the year, there probably won’t be left anymore taxes to pay if you opt for the tax to be automatically deducted. If the tax is not deducted from your earnings automatically, you have to settle the taxes for the past year in one lump sum payment.
In conclusion, it is important that you report your tax by the due date every year and promptly pay the tax. If you neglect to settle your tax, you will be penalized with fines, liens and jails if get caught. If you are inexperienced in filing tax for binary options, you should get a tax professional to report the trading income otherwise you may end up in trouble with the income audits.