How to Calculate Tax on Crude Oil Trading

Crude oil is one of the world's most popular markets, offering profitable opportunities across timeframes and different market conditions. Even though there are standard crude oil specifications, such as WTI crude oil and Brent crude oil, different regions apply taxes differently based on their internal tax codes.

Top Forex Brokers

1

Get Started 74% of retail CFD accounts lose money Read Review

In this article, I will cover:

• how crude oil trading profits are taxed
• how to calculate crude oil trading taxes
• whether you can avoid tax on crude oil trading

Crude Oil Trading Taxes in the USA 

Most crude oil trading in the US is done through futures contracts, subjecting it to the 60/40 tax rule. Let’s explore that rule first.

Crude Oil Futures: The 60/40 Tax Rule 

Futures and options contracts receive a special tax treatment of 60/40, where 60% of the profits are taxed as capital gains, and the remaining 40% are taxed as ordinary income.

Futures and options contracts also use “Mark to Market” accounting for tax purposes, where any unrealized gains or losses in open positions are counted for tax purposes at the end of the year.

The Federal Capital Gains Tax has three bands: 0%, 15%, and 20%. The percentage bands apply at different dollar levels that change each year to account for inflation. Federal Income taxes run from 10% to 37% across different income bands and marital categories.

Remember, state capital gains and income taxes may apply depending on where you reside in the US.

The 60/40 tax treatment is generally better than income tax because federal capital gains tax levels are lower than federal income tax levels.

Individuals can use capital losses as a deduction against ordinary income up to $3,000 in any tax year. Net capital losses over $3,000 can be carried forward indefinitely until the amount is exhausted.

Crude Oil ETFs: 60/40 Rule or Income Tax? 

Not all ETFs are created equally, and that affects their tax status. Some ETFs hold futures contracts, making them eligible for the 60/40 tax rule. Other ETFs may purchase equity in holding companies carrying the underlying assets, which subjects the profits to ordinary income tax.

ETF issuers and brokers often will have the tax information for US clients, and that’s probably the best way to find out which tax rules apply.

Trader Tax Status: Writing Off Business Expenses 

US traders can apply for “trader tax status,” more formally known as “a trader in securities for tax purposes,” if they can show their trading meets the level of a business or profession.

The IRS gives more information in their “Topic 429” (here).

There are two benefits to Trader Tax Status:

1. Taxpayers can write off business expenses related to their trading.
2. It removes a $3,000 limit on carrying over capital losses. If a trader experiences a large losing year, this can save tremendous amounts in future taxes.

Writing off expenses reduces the amount of payable income tax. Expenses can include:

• Education fees, such as books, courses and mentorship
• Subscriptions
• Equipment—computers, monitors
• Data feeds

The IRS gives some guidance on how a trader can show if individuals meet the Trader Tax Status conditions:

1. Trading activity must be substantial, regular, frequent, and continuous.
2. A taxpayer must seek to catch swings in daily market movements and profit from these short-term changes rather than profiting from long-term holding of investments.

The IRS’s guidance is subjective, but tax experts have suggested the following to meet the Trader Tax Status conditions:

1. Traders should average four transactions per day over four days per week, which amounts to 16 trades per week or 720 trades annually. Opening and closing the same trade counts as two transactions, and scaling and out of a trade also counts as multiple transactions.
2. The average holding period must be 31 days or less.
3. Traders spend more than four hours daily, almost every trading day, working on trading (this can be research and actual trading).
4. The trader has significant business equipment, such as computers and monitors, education, business services, and a home office.
5. Individuals must have at least $25,000 on deposit with a US regulated broker.

Tax experts also say that traders cannot use the following to qualify for Trader Tax Status:

1. Using externally developed automated trading systems.
2. Using a copy trading service or a money manager.
3. Trading retirement funds in non-taxable retirement accounts.

Calculating Your Crude Oil Trading Tax Liability 

Step 1: Determine whether your trading is eligible for the 60/40 tax rule. If you trade crude oil using futures, options, or eligible ETFs, it falls under the IRS’s “Section 1256” for tax purposes and receives the 60/40 tax treatment. Otherwise, it most probably falls under ordinary income tax rules.

Step 2: If the 60/40 applies, calculate Capital Gains Tax on 60% of the gains and Income Tax on the remaining 40%. Otherwise, apply ordinary income tax.

Can I Avoid Tax on Crude Oil Trading? 

The simple answer is that there is no legal means to avoid paying taxes on crude oil trading profits. The IRS will enforce collection, charge interest and late penalties on unpaid taxes, amongst other measures.

Tax Planning Strategies for Crude Oil Traders 

Here are my top tips:

1. Generally, the 60/40 rule means paying less taxes than ordinary income tax because Capital Gains Tax (which applies to 60% of the gains with the 60/40 rule) is less than income tax overall. Therefore, trade crude oil instruments such as futures or eligible ETFs that are subject to the 60/40 tax rules.
2. Consider applying for Tax Trader Status (IRS Topic 429), which allows you to write off business expenses under certain conditions and use the “mark-to-market rule (IRC 475) for a wash sale exemption.
3. Work with a Certified Public Accountant (CPA) who has experience working with traders. Some CPAs have not had clients who are traders and do not know the impact of relevant IRS rules to traders. A CPA with trading clients will give tailored advice on the tax codes and give informed recommendations on areas such as whether setting up an LLC or corporation is right for you.

Crude Oil Trading Taxes in India 

India's tax on non-agricultural commodity trading, including crude oil trading, is relatively new. It was first introduced in the 2013-14 financial year by the then Finance Minister, Mr. P. Chidambaramt. The tax has undergone several updates since then—let’s look at the current version.

How Crude Oil Trading Profits Are Taxed 

Trades are split into “speculative” and “non-speculative” categories for tax purposes:

Speculative trades are intraday trades, i.e., trades that are opened and closed within the same trading day.

Non-speculative trades are trades that are held for more than one trading day.

The only difference between “speculative” and “non-speculative” trading for tax purposes is the length of time an individual holds a trade.

Here's how to calculate the taxes on crude oil profits:

1. Individuals pay standard income tax rates on speculative and non-speculative trading profits. (The income tax rates are 0% to 30% applied across different income tax slabs).
2. Speculative losses cannot offset speculative gains. For example, if I made 1 lakh rupees in non-speculative gains but lost 1 lakh rupees in speculative losses, I still must pay income tax on the non-speculative gains.
3. Individuals can carry forward speculative losses for four years to offset future speculative gains.
4. Non-speculative losses can offset speculative gains. For example, if I instead made 1 lakh rupees in speculative profits but lost 1 lakh rupees in non-speculative losses, my income from trading for tax purposes would be zero.
5. Individuals can carry forward non-speculative losses for up to eight years and offset them against speculative or non-speculative gains.

As readers have probably noticed, the tax rules for trading with Indian brokers favor non-speculative trading (i.e., trades held for more than one trading day) compared to speculative trading (i.e., intraday trading).

Calculating Your Crude Oil Trading Tax Liability 

1. Divide trading profits and losses into speculative (intraday trades) and non-speculative (trades held for more than one trading day).
2. If both speculative and non-speculative trades are profitable, standard income tax applies to both categories.
3. If speculative trades have a net loss, carry them forward for up to four years against future speculative gains.
4. If non-speculative trades have a net loss, offset the losses against the current year’s speculative gains and carry forward any remainder for up to eight years.

Can I Avoid Tax on Crude Oil Trading? 

The simple answer is that there is no legal means to avoid paying taxes on crude oil trading profits. The Income Tax Department can apply fines, criminal charges, and wage garnishment, amongst other measures, to recover unpaid taxes.

Crude Oil Trading Taxes in Indonesia 

How Crude Oil Trading Profits Are Taxed 

Indonesia has straightforward tax rules for trading profits, including crude oil profits. All trading profits, regardless of instruments, types of markets, etc., are subject to income tax. Therefore, the Directorate General of Taxes (DGT) treats crude oil trading profits as income for tax purposes.

However, the DGT does not allow profits to offset trading losses against other income for tax purposes.

Calculating Your Crude Oil Trading Tax Liability 

Calculate the net profits from all trading activity with your Indonesian broker, including crude oil trading, and add that to your income when calculating the total income tax owed.

Can I Avoid Tax on Crude Oil Trading? 

There is no legal way to avoid paying income tax on crude oil trading profits in Indonesia. The DGT can issue fines or even seize assets to recover unpaid taxes.

Crude Oil Trading Taxes in Canada 

How Crude Oil Trading Profits Are Taxed 

The Canada Revenue Agency can treat trading profits for purposes in several ways:

1. Capital Gains Tax. The CRA applies Capital Gains Tax when trading is a hobby and not a primary source of income. The Capital Gains Tax rate is 50% of the Income Tax Rate. You cannot write off trading-related expenses if the CRA applies capital gains tax to your trading profits.
2. Income Tax. The CRA applies income tax to trading profits when it views your trading as a business or job. You can write off trading-related expenses if the CRA applies income tax to your trading profits. Expenses can include office equipment, data feeds, subscriptions, courses, etc.
3. Corporation Tax. Some active traders choose to set up corporations. This can often produce the lowest payable taxes, but there is additional work for a corporation, which usually involves hiring an accountant to compile accounts and file taxes.

The CRA uses four criteria to determine whether trading is a hobby or profession: how often you trade, how long you hold trades, how much time you spend trading, and how much money you make. Essentially, the more active your trading is, e.g., shorter-term trading, a higher number of trades, or more time spent trading, the CRA will more likely view your trading activity as a profession and, therefore, apply income tax.

Calculating Your Crude Oil Trading Tax Liability 

Step 1: Determine whether your trading is a hobby or is active enough for the CRA to consider trading to be your profession.

Step 2: If the CRA considers your trading a hobby, apply 50% of your income's highest marginal tax rate to your trading profits.

Step 3: If the CRA considers your trading a profession, calculate your total trading profits, subtract eligible expenses, and apply the highest marginal tax rate to the difference.

Can I Avoid Tax on Crude Oil Trading? 

It is illegal in Canada not to declare trading profits from your Canadian broker when filing taxes. The CRA can collect unpaid taxes, e.g., by garnishing wages or seizing bank accounts.

Bottom Line 

Most regions around the world tax trading profits, including crude oil profits. Some regions apply capital gains, income tax, or a blend of the two tax rates. When calculating taxes, I recommend using an online tax calculator or software application specializing in your region to help. If you feel your trading activity is complex, work with an accountant who has other trading clients, so they know the rules that specifically apply to traders. A good accountant can help you legally minimize your tax liability.