Kindly what tax implication are there in forex trading and when do they apply.
What I am trying to establish is will there be an amount witheld for tax on purchases & sales or only upon withdrawal of profits and how are is it calculated.
Glad to help you with your question.
The operative word in your question on FOREX trading is ‘trading’.
FOREX trading entails the buying and selling of FOREX. FOREX is therefore your trading stock. You buy and sell it for a profit. Check the definition of trading stock in section 1 of the income tax act (“the Act”). The first part of the definition says:
(i) anything produced, manufactured, constructed, assembled, purchased or in any other manner acquired by a taxpayerfor the purposes of manufacture, sale or exchange by the taxpayer or on behalf of the taxpayer;
Anything includes foreign currency. Bear in mind that foreign currency options contracts and foreign exchange contracts (both defined in section 24I) are specifically excluded from the definition of trading stock. Foreign currency is not excluded from the definition of trading stock.
Now that we’ve clarified foreign currency is trading stock, you should automatically be thinking of the trading stock provisions in section 22 of the Act.
When you buy the forex, you’ll get a section 11(a) deduction. When you sell the forex, that will be gross income as defined in section 1. Any opening and closing stock balances at the beginning or end of the year of assessment will be treated according to sections 22(1) and 22(2); i.e. closing balances of the FOREX are added to taxable income while opening balances are deducted from taxable income.
In essence, you are taxed on your profit from trading.
Furthermore, obviously taxable income is calculated in rands so when you buy/sell, you’ll have to convert to rands at either the spot exchange rate or the average exchange rate in line with section 25D(1) or (3) of the Act.
However, section 24I is also applicable. It deals with the gains and losses from foreign exchange transactions. s24I(2)(c) makes the section applicable to a natural person who holds a unit of currency as trading stock. This clearly applies to FOREX trading.
S24I(3) essentially includes in (or deducts from) income, any “any exchange difference in respect of an exchange item of or in relation to that person“. ‘Exchange difference’ and ‘exchange item’ are both defined also in section 24I. Exchange item includes a unit of currency.
The exchange difference definition in substance requires that you calculate the gain or loss on the currency bought and sold. You should convert that gain to rands using the exchange rates applicable on the day the currency was bought and sold. The profit from the trade will be added to taxable income while the loss will decrease taxable income.
In the case where the currency was bought but remains unsold at the end of a tax year, you would calculate the rand value of the currency at the time you bought it. You’d also calculate the rand value of the currency at the end of the tax year. The gain or loss calculated would also be included in taxable income.
From the above you can see that both sections 24I and sections 22 and 25D are applicable. so which one should you apply?
The answer lies in section 24I(6):
Any inclusion in or deduction from income in terms of this section shall be in lieu of any deduction or inclusion which may otherwise be allowed or included under any other provision of this Act.
“In lieu of” means instead of. Therefore section 24I applies instead of sections 22 and 25D.