How are binary options taxed?

Updated on: 6 January 2020

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Both in the case of trading Binary Options, as well as regarding any other lucrative activity, taxes have to be met. However, the tax on binary options will often depend on the state you are living in and the legislation that covers it. The main problem with the income generated in the trading business is that it is more or less regular, most of the times daily, making it difficult to keep track of all the profits and losses. As compared to the case when the income only comes once or twice a month.

What this means is that you, as the trader, have the responsibility to track and declare your profit, so that the tax may apply. Brokers have no obligation in this regard, because they act as intermediaries, not institutions, which means they are not obligated to keep track of their clients’ capital movement.

Do I have to pay taxes on binary options?

In essence, you have to pay taxes on everything. Every piece of income, regardless of its source, will go through IRS’s hands. In terms of binary options, there are 3 different types of taxes you need to consider, as a regular trader:

– Gambling taxes

– Tax on capital gains

– Income taxes

Regarding the binary trading, the income has been included in the category of capital gains. But a proper classification has to take into account several aspects, including the amount you are receiving and the time period involved. If we are talking about minor income amounts, spread over longer periods of time, or even shorter ones, as long as their value remains low, they will be qualified as extra earnings. Bigger amounts during regular periods of time will fall under the category of capital gains.

The income tax on binary trading differs according to the location you are activating in. In this regard we have 2 major categories: US and EU.

How are binary options taxed in US?

In the US, the binary options income has been classified as capital gain and it is taxed accordingly. It goes the same whether you activate as a business or a self-employed individual, meaning that you are obligated to declare your income in the yearly tax report.

In US, there is a major difference in terms of regulating the tax on binary options. Regardless of the fact that you live on US territory, the IRS will not issue tax documents if your Binary Options broker is off-shore. The same goes if the broker is unlicensed. For any other cases, a specific legal form is applied, depending on how the IRS views your income.

Such categorizing that, as previously specified, will depend on the amount of the income and the period of time it progresses over. And the main problem revolves around the IRS’s predilection to categorize your non-US Binary Options trading income one way or another.

In essence, there are 2 main income tax forms referring to binary options taxes US traders:

1. The FinCEN Form 114

This is to be applied whenever you will reach $10,000 in earnings within the tax year. It does not refer to the total amount per transaction, but to the total amount earned within the taxable year in progress.

2. Form 8938

It comes in effect each time your total earnings reach the $75,000 within the tax year. The same form has to be filed in case your earnings reach $50,000 on the last day the income taxation form needs to be filed.

These forms, however, constitute the more uncomfortable solutions to the problem. The easier solution is to operate in partnership with a US regulated Binary Options broker, as many of them will provide you with a 3rd, more effective alternative – Fill in a tax declaration form.

The broker will then submit the form to the IRS and the tax deductions will be completed automatically, with each trade delivering income. This doesn’t mean you are exempted from filling in the end-year report, but the fact that you will be able to pay your taxes throughout the year, rather than in one big payout is a great advantage. Which is why most traders resort to this method, instead of filling tax forms regularly.

How are binary options taxed in the EU?

Just like in the US, binary options trading is considered a legal activity, with one major difference – such activities are less regulated than the US-based ones. European directive MiFID2 specifies that any broker who is registered and activates in an European country is free to sell his services to any individual or company residing in another European country.

However, the EU concept of allowing and promoting the free market brought along a more sensitive matter, which was the poor regulation. As a result, regulatory entities were put in place and, in this regard, we have 2 of the most proeminent EU binary options regulators: Cyprus and UK.


It was in the 2012 when Cyprus declared binary options financial instruments and elaborated a set of regulations to eliminate and restrict fraudulent practices and control the activity.

As a result, we now have the Cypriot Financial Supervisory Authority (CySEC) regulating the trading activities in the EU and it makes for one of the most influential regulatory entities on the planet. This influence has defined the tax on binary options, reducing or eliminating tax evasion and enforcing regulations that spread over the entire EU trading activity sector.


Brokers and traders activating under the UK jurisdiction are required to pay an income tax on binary trading. However, this does not mean that the brokers are in any way obligated to provide the traders with any tax documents. Some will, nonetheless, keep track of all the transactions taking place, in order to assist the trader with keeping record of their activity.

In the UK, you have the option of classifying your binary options profits as gambling income, normal income or capital gain. As a result, different taxation rules may apply, depending on that simple factor.

The good thing is that losses can be cut from the taxation process, because the UK regulation allows you to deduct them from the final amount. As for how much you need to pay, it all depends on a number of factors and that can only be properly understood by resorting to professional assistance.

It will also help you avoid any potential misunderstandings, that may result in extra deductions, penalties and so on.

Income tax on binary trading – How to

It all comes down to keeping track of your regular transactions, along with all the net profits and losses. Some brokers will do that for you on request, others will not. But recording all your income will help you decide what category to include it in and what path to follow when it comes to submit the tax form, under the current legislation.

In this regard, both the IRS and CySEC are pretty drastic when it comes to tax violation, so you might want to tread with caution. The best thing to do is to resort to the services of a professional tax advisor and take it from there.

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