There are a few types of taxes a binary options trader needs to consider. Gambling Tax, Capital Gains Tax and Income Tax.
American Binary Option Taxes
In the United States, the IRS discusses gambling tax at length and has specific examples for tax on gambling winnings which get reported by the casino on a form W-2G, see here. If you are using an offshore unlicensed Binary Options Broker, they will not issue you any tax documents, because they are not legal exchanges.
Investors using a legal binary options exchange like Nadex, will receive an IRS Form 1099-B which is “Proceeds from Broker and Barter Exchange Transactions. The type of income is Regulated Futures / Options.
In general, your capital gains for tax filing purposed are reported on your form 1040D. On the form is a portion for short term and long term capital gains. Options held for less than a year go on the short term capital gains form.
Will the IRS consider binary options traded on a non US regulated brokers platform to be considered a short term capital gain/loss or some other type of income? Speak with your accountant about this.
As far as the IRS is concerned, all income is taxable. You can call it business income, self employment income, or even a large gift from Grandma, it is all taxable, and the IRS wants a piece of it.
European Binary Option Taxes
CySEC in Cyprus regulates binary option brokers, and by virtue of Cyprus being a member of the European Union, authorized binary option brokers will fall under the category of investment firms under MiFID.
This should make binary option profits taxable as investment income or capital gains.
In the United Kingdom, binary options are suppose to be regulated by the FCA. Starting January 2018, they hope to have the regulatory oversight formalized and in place at the Financial Conduct Authority (FCA) and make binary options like other stock market trading activity.
A recent check of HM Revenue & Customs shows no results in their FAQ section regarding binary options. The HMRC in the UK has a two tier capital gains tax of 18% & 28% on capital gains after exceptions. View more on HMRC capital gains.
Where it stands today, you need to ask your accountant.
So to summarize, if you are filing your taxes yourself, then your guess is as good as ours. If you are using a tax preparer or accountant to file your taxes, then ask them, because that it why they get paid the big bucks!
Binary Option Withdrawal Tax
We have received questions from various investors regarding a CySEC tax, or brokers tax on withdrawal of profits.
This is actually a major scam that illegal companies do when they do not want you to withdraw your money. A scam broker will tell you that in order to withdraw you money you need to pay them a tax of 5% or 10%. There is no basis to such a request, and they are simply looking to steal more money from you.
If you a broker is not processing your withdrawal in a timely manner, there is a good chance they are a scam.
Read more about broker complaints and scams.