Tax Day Approaches: File Your Futures Taxes The Right Way

The last day to file taxes - April 17, 2018 - is just around the corner. Make sure you know how to file for all of your investments, whether it’s your first time trading futures or you’re a seasoned investor.

The Futures Trading Tax Process

Like any other form of investment, the tax rate for futures trading is the capital gains rate. Capital gains only kicks in on profits made from the sale of futures contracts. If you sell your futures within a year and make a profit, you will have to pay capital gains tax.

The tax rate ranges from zero to 20 percent depending on the amount gained.

Necessary Paperwork

In order to file taxes on futures trading, the most important paperwork you will need is the Form 1099-B from your futures broker. This form will have the ID of the broker and the amount that you’re liable to pay taxes.

You will also need a few more documents. The Form 1040, Schedule D helps determine the taxes that you will owe. Form 8949 shows how much you owe and is the form you need to provide and file. After that, add the amount owed into your overall tax bill.

How To Prepare Your Taxes

You can do it yourself or use an accountant. An accountant can help you maximize your deductions and lower your tax rate. If you have the money to invest in futures, there's a good chance that your taxes will be a bit more complicated than the average investor’s. Using a tax accountant comes at a certain cost. That cost increases as you use more sophisticated tax vehicles.

Doing your taxes yourself will be cheaper. Tax preparation software is only a few dollars, or in some cases, for free. These pieces of software have extensive lists of questions and prompts about deductions in order to minimize tax bills and maximize refunds. They're pretty user friendly, too. However, they're far from perfect. Sometimes, deductions and beneficial tax structures are left behind.

If you go the DIY route, know that you have the ability to reduce your tax liability by selling assets at certain times of the year. Use a tax-deferred account that allows your money to grow tax-free.

The prospect of paying taxes on futures earnings may seem daunting, especially for first time investors. But, futures earnings are just another part of the capital gains aspect of the tax code.