Forex Trading in the USA - Everything You Need to Know
One of the common doubts that people often have in their minds is whether forex trading is legal in the US. Even while researching whether forex trading is legal in the US, you might have come across conflicting opinions and information regarding the same.
A lot of confusion arises from the fact that there are several legal changes between the US forex market and other world markets. If you had similar doubts, or if you have been wondering how to start forex trading in the US, this article will help you clear your doubts.
The Legal Status of Forex Trading in the US
At the outset, let us make it clear that forex trading is legal in the US. However, it comes with a lot of differences when compared to trading in other parts of the world. Hence, you must understand them clearly before venturing into forex trading. Remembering the legal changes is one of the main factors to make sure you don’t do anything illegal while conducting forex trade in the US.
In this context, it is also important to reiterate that forex trading is allowed in all countries where currencies are allowed. This is precisely why the forex market is the largest financial market in the world.
One of the reasons why people think forex trading is illegal could be the outcome of the Dodd-Frank law which placed several limitations on the financial system. This applies to hedging, leverage caps, and other practices.
Also, the law made it mandatory for traders to file annual tax returns based on the trader’s income brackets. Usually, 60% of the income is subject to 15% tax and the remaining 40% will be taxed based on the income earned.
It is important to understand this tax regimen because, if you break the laws, the penalty could be a heavy fine. US regulatory bodies closely monitor the activities of brokers and the US brokers need a license to offer trading services.
Who Can Trade Forex in the US?
Now that it is clear that forex trading is legal in the US, it brings us to the next question – who can trade forex in the US. The short answer is – people of any nationality can trade forex within the US. However, a few limitations may be imposed on US residents.
US citizens and US residents can invest and trade in the forex market. But, the limitations on brokers and strict financial laws mean the US citizens have access to brokers and traders in the home country only.
Non-US residents can trade forex within the US as you would do anywhere else in the world.
Find a Forex Broker in the USA
Every forex broker operating within the United States should register with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). Without the registration, you cannot operate or offer clients any services. Brokers from Europe and other parts of the world do not offer services for US traders because they cannot do so without a regulated license.
Since the requirements for obtaining a license to trade within the US are regulated licenses and a security deposit of $20 million, not many non-US brokers venture that. However, it is possible that the brokers elsewhere may offer their services to US traders as well. It would be wise to confirm they are licensed to trade in the US before you sign along the dotted lines.
Read More: How Forex Trades are Taxed in the USA
Finding a US Forex Broker
If you are looking to get into forex trading in the US, it is better to opt for a US trader approved by the regulating bodies - NFA and CTFC.
This is the safest and wisest route before you. You can see if their brokerage is NFA or CTFC regulated. Make sure you exercise high caution while researching. Many brokers might look professional and experts but might not be legally registered.
If you choose such a broker, you might end up in an unfortunate circumstance where you might lose your investment and deposits or be a party to illegal acts.
Always check the NFA website to confirm if the broker you found is regulated.
Where Can I Trade Forex in the USA?
There are several forex brokers such as FOREX.com, IG, and TD Ameritrade for you to start your forex trading online.
- Forex.com is a good platform to invest and join US and forex trading markets across the world.
- IG is an English platform with a lot of trust and respect globally across the market and has a global reach of over 19,500 tradable assets.
- TD Ameritrade is an online desktop trading platform available only for US residents to trade Forex.
US Investors Looking to Trade Overseas
For the US investors who wish to trade overseas, things can get a bit tricky because of the process as well as the strict requirements for investing overseas. The first thing to do is to make sure your broker is CFTC regulated to be able to trade.
Secondly, the tax laws can complicate things for you. If you are in the U.S and trading overseas, you will have to pay the taxes as you normally would at 60/40. You will not be exempted from paying taxes because you are trading overseas.
Differences in Forex Trading in the US
Forex trading in the US is slightly different because of the changes in laws as mentioned above. The main differences are as under:
Ban on hedging
NFA, in a statement released in 2009 confirmed few new rules which included a ban on hedging with forex trading within the United States. This decision was taken mainly to stop or eliminate any opportunity to profit from a transaction. So, make sure you don’t go breaking the rules as that can be costly in more ways than one.
It is also worth mentioning that the FIFO ‘First in first out’ rule was also amended. It is a forex trading requirement for compliance. It stipulates that the first or oldest trade must be closed if you have more than one trade of the same pair and size.
The rules surrounding Leverage were also amended and reduced for US forex brokers to 1:50 or 50:1. It means for every $1 you invest you can trade $50 of a major currency and 20:1 or 1:20 for a secondary pairing.
Forex trading in the US is legal and doable. The important thing to remember is that you should comply with the US law and tax requirements applicable for US forex trading. And it would be advisable to do a lot of research and get ample practice through your demo accounts before you start trading.
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