Forex Brokers in the United States

Yes, forex trading is legal in the United States. Forex brokers must be registered with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) in order to operate legally within the country, while traders are highly advised to register and deposit their funds to CFTC and NFA-regulated brokers to ensure their safety.

Yes, forex trading is subject to taxation in the United States. The taxation of forex trading profits and losses falls under the jurisdiction of the Internal Revenue Service (IRS). In this case, traders have the option to be charged under the 1256 contracts or the distinct guidelines outlined in IRC Section 988.

What are the differences?

Technically, forex options and futures contracts fall under the IRC Section "1256" contracts, which adhere to a 60/40 tax allocation. To elaborate, 60% of gains or losses are recognized as long-term capital gains or losses, while the remaining 40% is classified as short-term. Your yearly earnings constituting 60% will be subject to a fixed tax rate of 15%. Conversely, the remaining 40% will be taxed depending on your income.

On the other hand, those engaged in spot forex trading are recognized as "988 traders" as they abide by the IRC Section 988. This specific rule allows traders to deduct their entire losses for the year. All profits generated from forex trading will be subjected to taxation at a rate equivalent to the trader's income tax bracket, which encompasses a spectrum from 0% to 37%.

Presented below is a straightforward tax reporting example for 2020 forex trading in the US under the IRC Section 988:

Typically, Section 1256 is a favorable choice for traders within the 22% income bracket or higher. Section 988, on the other hand, is preferred by traders with lower incomes.

Each country may have certain trading regulations that affect forex traders. Here are some key restrictions from the US financial authority that may influence your trading conditions:

• The US has imposed regulations on leverage for retail forex trading. The maximum allowable leverage for major currency pairs is typically limited to 50:1, and for minors, it can be even lower. This is in place to protect traders from excessive risk.
• US forex brokers are required to segregate client funds from their own operational funds. This helps ensure that client funds are protected and not used for the broker's business activities.
• Hedging (holding offsetting positions to mitigate risk) is restricted in the US forex market. Traders are not allowed to open opposing positions on the same currency pair.
• The "First In, First Out" (FIFO) rule requires that if a trader has multiple positions in the same currency pair, the first position opened must be the first to be closed.
• US forex brokers are prohibited from engaging in certain activities, such as guaranteeing profits, promising high returns with low risk, or manipulating trading conditions. This may ensure better security against Dealing Desk frauds, but limit the opportunity of acquiring trading bonuses and rewards at the same time.

Here's a checklist to help you choose the best brokers:

1. Prioritize brokers that are regulated by CFTC and NFA. You can verify the status on the NFA Basic webpage.
2. Ensure the broker offers competitive trading specifications that comply with US regulations.
3. Evaluate the available trading platforms. Look for user-friendly platforms like MetaTrader 4 (MT4) or MetaTrader 5 (MT5), as well as any proprietary platforms offered by the broker.
4. Consider the variety of trading instruments available, including currency pairs, commodities, indices, and cryptocurrencies. Broader asset options provide more trading opportunities.
5. Compare spreads, commissions, and other fees across different brokers. Lower trading costs can significantly impact your overall profitability.
6. Verify the availability of convenient and secure deposit and withdrawal options that suit your preferences.
7. Test the broker's customer support responsiveness and accessibility. Prompt and effective support is crucial in case issues arise.
8. Look for brokers that offer educational materials, webinars, tutorials, and market analysis to help you enhance your trading skills.
9. Consider brokers with additional licenses from respected regulatory bodies beyond the US, such as the Financial Conduct Authority (FCA) or the Australian Securities and Investments Commission (ASIC).
10. Prioritize brokers with robust security measures, including data encryption and segregated client funds.
11. Assess the availability of advanced trading tools such as technical analysis indicators, economic calendars, and risk management features.
12. Opt for brokers that offer demo accounts. These accounts allow you to practice trading without risking real money, helping you familiarize yourself with the platform.
13. Research online reviews and feedback from other traders. This can provide insights into the broker's reputation and customer satisfaction.
14. Choose brokers that provide clear information about their trading conditions, fees, and policies.
15. Consider brokers that offer mobile trading platforms, allowing you to trade on the go.
16. Look for brokers that stay updated with technological advancements, providing access to modern trading features.
17. Start with a small deposit and trade with real money for a short period to test the broker's services before committing substantial funds.