As the appetite for Forex trading has grown in the Philippines, so has the necessity to understand the tax consequences for Filipino traders. Although understanding tax rules is often not at the top of the list for traders, there are consequences in every country, including the Philippines, for not meeting tax obligations.
In this article, I will give an accessible guide to the tax obligations for Filipinos, covering:
- how forex trading profits are taxed in the Philippines
- the tax rates that apply
- tax planning strategies for forex traders
Let’s begin.
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How Forex Trading Profits Are Taxed in the Philippines
The Philippines government and the Bureau of Internal Revenue (BIR) categorize trading as a business activity or a profession. Some countries, such as the UK and Singapore, only categorize trading as a profession for tax purposes when an individual is a very active trader. However, in the Philippines, it does not matter if trading is a small hobby or a full-time profession—the tax treatment is identical.
Given that the Bureau of Internal Revenue considers trading a profession for tax purposes, trading profits are subject to ordinary income tax.
Income Tax Rates—Philippines
If you live and work in the Philippines, you probably already have a good idea of the country’s income tax rates. But let’s take a moment to review the rates.
TAXABLE INCOME | TAX RATE |
|---|---|
Up to PHP 250,000 | 0% i.e. tax exempt |
PHP 250,000 - 400,000 | 15% |
PHP 400,000 - 800,000 | 20% + PHP 22,500 |
PHP 800,000 - 2,000,000 | 25% + PHP 102,500 |
PHP 2,000,000 - 8,000,000 | 30% + PHP 402,500 |
| Over PHP 8,000,000 | 35% + PHP 2,202,500 |
Forex Tax Example
Let’s say an individual has an annual income before trading of PHP 1,000,000. Their income tax would be PHP 152,500. Now, let’s say they made PHP 300,000 in Forex profits. That additional income would fall into the 25% level, effectively adding PHP 60,000 to their income tax, for a total of PHP 360,000 payable in income tax.
Tax Deductions and Allowable Expenses
Notice the above table refers to “Taxable income.” This is because Forex traders can deduct expenses related to their trading. This can include:
- Computer equipment and screens
- A portion of internet costs
- Payments for office space and office furniture
- Charting platforms and access to data feeds
- Brokerage fees and commissions
- Training and courses
All these expenses can add up and help reduce your final tax burden.
Filing Forex Profits and Losses in the Income Tax Return
When filing income tax returns, enter Forex gains as part of "Other Taxable Income," which will then be included in calculating the "Total Taxable Income" or "Gross Taxable Income."
Calculate Only Realized Forex Gains and Losses
You may be in a position where there are open trades when it comes time to file tax returns. The standard practice accepted by the BIR for income tax returns is to include realized gains and losses, not unrealized ones. I.e. Only include the net profit or losses from closed trades.
Forex Losses
If you have a net loss in your Forex trading, you may deduct that from your Income for tax purposes. In this scenario, present them as part of the "Ordinary Allowable Itemized Deductions" in the income tax return.
Tax Residents vs. Non-Residents
The BIR uses the widely accepted international standard for tax residency, which defines a tax resident as anyone who stays in the country for 183 days or more. These do not have to be consecutive days.
Tax Residents: Philippines tax residents pay tax on their worldwide income, including Forex trading profits.
Non-Tax Residents: Individuals spending less than 183 days in the country annually are taxed only on income derived from Philippine sources, such as a job or contract. If Forex profits are not sourced within the country, they may not be subject to Philippine income tax. This is where consulting a tax professional would be valuable: perhaps you have spent less than 183 days in the country but mainly traded while in the Philippines. In this nuanced situation, a tax professional can clarify your tax obligations.
How to Avoid Tax on Forex Trading in the Philippines
When answering that question, let’s first underline that Filippino tax residents making Forex profits absolutely must declare their Forex profits when filing income taxes. In recent years, the BIR has successfully implemented programs to recover unpaid taxes and bring to justice tax evaders because the Philippines loses PHP 500 billion annually to tax evasion. Aside from having to pay the taxes, tax evaders face up to ten years in jail. Notably, the Supreme Court ruled that tax evaders cannot use the excuse that they relied on their accountants to claim innocence.
Tax Planning Strategies for Forex Traders
Keep detailed records. It’s impossible to pay taxes accurately without reliable records. In particular, maintain records detailing:
- The date and time of all trades
- The underlying market or instrument for each trade
- The profit or loss for each trade
The best Forex brokers in the Philippines will automatically produce statements detailing transactions and trade records rather than requiring traders to keep manual records. I recommend downloading and storing trading statements locally rather than having your broker or platform store them. They may not store records indefinitely, and if you change brokers, they may automatically delete records.
Deduct as many expenses as possible. Keep records for anything you use as part of helping you trade: a new desk or lamp, computer upgrades, trading signals, charting package costs, e-books, training courses, etc. All these costs add up quickly and can help you reduce your taxable income.
Use a tax professional. This is particularly useful in complex situations such as non-residency.
Contact BIR. Taxpayers with tax questions can call the BIR Customer Assistance Division Hotline at 8538-3200 or email contact_us@bir.gov.ph.
Consider becoming a non-resident. This may not be feasible for most people, but some traders live in different locations for tax purposes. If Forex profits justify the effort, this may be a potential strategy.
Bottom Line
Forex trading in the Philippines is considered a business or a profession for tax residents, and the BIR treats profits as ordinary income for tax purposes and, therefore, taxes them at income tax rates. The BIR rules allow taxpayers to deduct expenses for items that enable them to carry out their trading activities. This could be as varied as office furniture, computer screens, data feeds, books, courses, etc. I have found these expenses add up very quickly and are easy to forget if I don’t record them. Also, keep detailed records of your trades—the easiest way to do this is to save broker statements. Remember, the BIR is interested in realized Forex profits or losses in the income tax return, i.e., closed trades. The BIR allows taxpayers to subtract Forex losses from their income. If your situation is complex, consider using a tax professional. The BIR proactively pursues and punishes tax evaders with fines and even jail, so always declare Forex profits in tax returns.
