Best Country for Trading (Tax efficiency)

[alexanderhu]

Hi, I just found this thread and hope you don't mind me asking a dumb question. I am from South Africa. What I want to know is what is the effective tax rate on profits from trading equities and equity derivatives for a US resident in say California, trading an Interactive Brokers account. Is the trader taxed at his highest marginal tax rate? or is there some sort of lower flat rate for trading profits?

It depends on your tax strategy. The following is for single taxpayers as the thresholds are different for married people filing jointly:

- If you trade equities on your own name then your trading income may be taxed on a marginal scale up to 37% on the federal level. This rate kicks in from ~$510,300. In the state of California the highest marginal tax rate is 13.3% over $1 million. Another 3.8% medicare tax applies over $250,000. Therefore the highest marginal tax rate in the state of California in this example is 54.1% if you make more than $1 million a year.

- If you trade futures on your own name then your trading income may be taxed on a marginal scale up to 30.2% on the federal level. This rate kicks in from ~$510,300. In the state of California the highest marginal tax rate is 13.3% over $1 million. Another 3.8% medicare tax applies over $250,000. Therefore the highest marginal tax rate in the state of California in this example is 47.3% if you make more than $1 million a year.

- If you use a company taxed as a corporation to trade, then your entity will be liable to the 21% federal corporate tax and the 8.81% corporate tax in California. This may result an effective tax rate of 29.81%. When you distribute a dividend to yourself then you have to pay another up to 20% income tax on the dividend, 3.8% medicare and up to 13.3% income tax to California. This may result in a 37.1% marginal tax rate in the state of California. The marginal combined tax rate in this example may be as high as ~55.85%. In many cases the IRS expects you to pay yourself a salary equal or higher as the average that another person would receive in a similar position. Needless to say, this is because salaries are subject to other social security taxes and levies.

- If you use a company taxed as a partnership to trade, then your entity will pay no federal corporation tax but will pay the 8.81% corporate tax in California. Then you distribute the taxed income to yourself and you pay the up to 37%+13.3%+3.8% on the distribution. Your marginal tax rate in this example may be as high as ~50.67%. In many cases the IRS expects you to pay yourself a salary equal or higher as the average that another person would receive in a similar position. Needless to say, this is because salaries are subject to other social security taxes and levies.

I'm not a tax advisor, these figures may not be correct and accurate and you may be liable to pay a higher or lower tax rate depending on your personal circumstances. Also, the above mentioned tax strategies may not work and you may be liable to additional taxes and levies. Please seek professional advice from a licensed tax advisor.

 

[Signate67]

Thanks very much Alexander. Very helpful.

 

[CALLumbus]

By the way, another nice and new option in the EU where the personal income tax rate is flat 10% from 2018 is Romania. I think it may be safer than Bulgaria and you can pay the same 10% on your trading income and 5% on dividend income. Some social security applies on the first X Euros just like in Bulgaria but that applies in almost all the EU countries anyway. At least it is capped at a certain level, unlike in Switzerland. Also, you can create a company and pay 1-3% tax on the first €1 million of revenue. Note that, this tax is based on the revenue, not on the profit. Combined with the 5% dividend tax, it's not bad either.

Why do you think is Romania safer than Bulgaria ? I think they are pretty much the same or no ?

 

[alexanderhu]

Why do you think is Romania safer than Bulgaria ? I think they are pretty much the same or no ?

It's just my opinion but I don't see things likes this in Romania that often. These are from 2018:

https://www.theguardian.com/world/2...marinova-admits-attacking-her-say-prosecutors

https://www.theguardian.com/world/2...businessman-killed-in-broad-daylight-in-sofia

Also, based on my knowledge, in general mafia and other random fights are more common in Bulgaria. For instance even foreigners and tourists can end up in strange situations. There were situation (check tripadvisor) when some was hit by the security in night clubs and in general were really aggressive. I "know" a woman who was punched in the face by the security in a night club. I never heard things like this from Romania. In general I have the impression that Bulgaria is more like Eastern Europe and they're more into that mafia style things while Romania is more of a law abiding country. I can be totally wrong but it's really important to note that mafia in Bulgaria is big and still strong because of the drug trade that comes from the neighboring non EU countries through Bulgaria.

Someone even tried to murder a tax officer at the end of 2017:

http://bnr.bg/en/post/100911912/the...x-officer-stamenov-chief-prosecutor-tsatsarov

 

[Hittfeld]

ROFLMAO.

What if you have a house in Spain and also one in Germany? Double residency and double taxation? LOL.

There is no such thing as double residency in German Tax Code. If you have permanent possibility of access to an overnight shelter you are subject of german taxation: For example if you have a key to your room in your parents house, or keys to a flat that you rented but not let to a subtenant, keys to camper vehicle ..... So whenever you can permanently decide without another person/parties decision ( hotel, staying with friends) you will be liable to german taxation. There are other factors (center of your life) but if you have a flat, an adress, a bank account, phone number and your family physician in Germany --- you`re really endangered - if you are not employed in the other country.

Regarding Spain: There is a DBA (Double Taxation Avoidance Agreement - Doppelbesteuerungsabkommen) between both countries which clarifies details.

Take care

 

[Hittfeld]

Is there anyone who knows how much tax traders should pay in Germany? Not investors or occasional traders, but full-time daytraders.

If you don`t use a commercial setup but trade as a private trader it should be flat rate of ca 26,3 % of trading results - no deductions for office/car/seminars/datafeeds/software...
Additionally obligatory SocialSecurity&Health deductions.

Don`t forget: Traders and especially day traders have not the best standing in Germany socially and even more with authorities and even more taxmen.

 

[alexanderhu]

If you don`t use a commercial setup but trade as a private trader it should be flat rate of ca 26,3 % of trading results - no deductions for office/car/seminars/datafeeds/software...
Additionally obligatory SocialSecurity&Health deductions.

Don`t forget: Traders and especially day traders have not the best standing in Germany socially and even more with authorities and even more taxmen.

Thank you, much appreciated. What do you mean by commercial setup? Are you sure the capital gains tax rate applies to full time daytraders as well? Why daytraders are not liked by the authorities, by the tax authorities and by people in general?

 

[Hittfeld]

You could setup a company (GmbH - Limited Liability Company - min capital 50K€ half of paid down) and be its sole shareholder and employed director. That means 4 different tax cases: The company with its profits (and costly accountancy, tax advisors..) , your income from employment, your income from dividends of said company and final redistribution of profits when firm is closed or sold. So ask an advisor and pay their bills.

If you remain a private trader you are solely and only taxed by flat taxation rule of "Abgeltungssteuer": Everything is then based on the net profit of your trades, the trade profits as showed in your broker statements minus previous loss setoff plus interest paid to you . No further deductions, not even for interest paid for debit positions or use of margin. Not for car, room, internet provider , vpn. And no deductions taxwise for any other levy, insurances etc. You will be liable to pay an advance on your taxes quaterly or monthly if you use a foreign broker, german brokers will deduct directly from every trade.

If your final annual income was less than 120k@ the tax authorities will reduce the tax load by applying the percentage that the regular (progressive) taxation rules would require. But still no deductions like in regular tariff.

In Germany "capitalism" is a dirty word, "profit" is indecent and tax evasion is considered and punished harder than child abuse! Exchanges are considered to be worse than casinos and as an options traders you would be on every short list of "the usual supects". So take care!

This is no legal and/or tax advice. Just some memories of a german trader living as an expat told for your entertainment.

 

[alexanderhu]

You could setup a company (GmbH - Limited Liability Company - min capital 50K€ half of paid down) and be its sole shareholder and employed director. That means 4 different tax cases: The company with its profits (and costly accountancy, tax advisors..) , your income from employment, your income from dividends of said company and final redistribution of profits when firm is closed or sold. So ask an advisor and pay their bills.

If you remain a private trader you are solely and only taxed by flat taxation rule of "Abgeltungssteuer": Everything is then based on the net profit of your trades, the trade profits as showed in your broker statements minus previous loss setoff plus interest paid to you . No further deductions, not even for interest paid for debit positions or use of margin. Not for car, room, internet provider , vpn. And no deductions taxwise for any other levy, insurances etc. You will be liable to pay an advance on your taxes quaterly or monthly if you use a foreign broker, german brokers will deduct directly from every trade.

If your final annual income was less than 120k@ the tax authorities will reduce the tax load by applying the percentage that the regular (progressive) taxation rules would require. But still no deductions like in regular tariff.

In Germany "capitalism" is a dirty word, "profit" is indecent and tax evasion is considered and punished harder than child abuse! Exchanges are considered to be worse than casinos and as an options traders you would be on every short list of "the usual supects". So take care!

This is no legal and/or tax advise. Just some memories of a german trader living as an expat.

Thank you, really useful. I didn't know about the requirement to pay tax in advance if you use a foreign broker. This really is bad, especially if you have to estimate your final tax liability in advance and transfer the advance payments based on your estimates. Even worse if you have to transfer it in four equal installments and pay penalty and/or interest if you underestimated your final tax liability. The last part was funny. Could you please give me a link where I can find detailed information about the quarterly payments should I wish to move to Germany and pay more tax than I do now?

 

[schweiz]

There is no such thing as double residency in German Tax Code. If you have permanent possibility of access to an overnight shelter you are subject of german taxation: For example if you have a key to your room in your parents house, or keys to a flat that you rented but not let to a subtenant, keys to camper vehicle ..... So whenever you can permanently decide without another person/parties decision ( hotel, staying with friends) you will be liable to german taxation. There are other factors (center of your life) but if you have a flat, an adress, a bank account, phone number and your family physician in Germany --- you`re really endangered - if you are not employed in the other country.

Regarding Spain: There is a DBA (Double Taxation Avoidance Agreement - Doppelbesteuerungsabkommen) between both countries which clarifies details.

Take care

I agree with you: There is no such thing as double residency in German Tax Code.
Double residency does in general not exist in Europe. So if it would be used it would be a very rare exception. Buying a house is surely not good enough for that.

The general rules are mentioned here: https://europa.eu/youreurope/citizens/work/taxes/income-taxes-abroad/index_en.htm

Which country can tax you?
There are no EU-wide rules that say how EU nationals who live, work or spend time outside their home countries are to be taxed on their income.

However, the country where you are resident for tax purposes can usually tax your total worldwide income, earned or unearned. This includes wages, pensions, benefits, income from property or from any other sources, or capital gains from sales of property, from all countries worldwide.
Each country has its own definition of tax residence, yet:

• you will usually be considered tax-resident in the country where you spend more than 6 months a year
• you will normally remain tax-resident in your home country if you spend less than 6 months a year in another EU country.

Dual residence
In some cases, two countries could consider you a tax-resident at the same time, and both could require you to pay taxes on your total worldwide income. Fortunately, many countries have double tax agreements

, which usually provide rules to determine which of the two countries can treat you as a resident.

If the tax treaty does not provide a solution or if your situation is particularly complicated, contact the tax authorities

of one or both countries and ask them to clarify your situation.

Fictitious tax residence
Under some double tax treaties

, the country where you earn all or almost all of your income will treat you as tax-resident, even if you don't live there. This status of fictitious tax-resident is granted by some countries to cross-border commuters.

What income will be taxed in Germany?

• You have lived in Germany for more than 6 consecutive months? You are considered ‘ordinarily resident' in Germany and, as such, are subject to unlimited tax liability and must pay tax on your worldwide income there.
• You have lived in Germany for no more than 6 months? You are not considered tax resident, and pay tax only on income earned in Germany (limited tax liability).
• You receive income from other EU countries? Make sure you are not paying tax twice on the same income.