Is forex trading legal in the US?

Forex trading is a big market with trillions of dollars traded every day. And this happens 24 hours a day and seven days a week across different continents. The good thing about trading is that everything happens online, and anyone can trade. That is assuming forex trading is legal in your country.

Most countries in the free world allow forex trading. Forex is vital in the economy. And currency exchange is needed in the import and export of products. How else will you pay for the goods if you don’t have the local currency? The majority of the countries in Central and Eastern Europe and Asia allow forex trading. But countries with authoritarian regimes tend to either restrict or limit the trading of currencies. It includes China, Russia, and North Korea.

What about the United States of America? Is currency exchange legal in this country? The USA is the biggest economy in the world. And their notes, the US dollar, is the most traded currency on earth today. It is no surprise that there is a lot of interest in this subject. It is a familiar topic with Americans and people living in the USA. And also among the rest of the people of the world. There is too much at stake for the US dollar as this is the currency reserve of many countries. The US dollar index is also the benchmark for local currency value almost everywhere you go.   

Is it lawful to trade forex in the US?

Yes, you can trade currency pairs in the US. The concept of currency exchange is used and accepted in the United States. But it is strictly regulated by laws governing forex trading. It might be the reason for the confusion and misinformation of the public. Online articles, chats, and forums confirm that people are not clear on this.

Before the 2008 financial crisis, forex trading in the United States follows the same practice as in Europe and other parts of the world. In Europe, for example, if you get regulatory approval in one country, you can start your trading business in all of Europe. And this includes the United States. But after the implementation of the Dodd-Frank Act in 2010, the rules have changed.

This law created several regulatory agencies. Since then, even if a company operates in other markets and gets regulated in that market, it needs separate regulatory approval in the US. Two agencies have the specific task of reviewing and monitoring the forex market in the US. These are the CFTC or Commodity Future Trading Commission and the NFA or National Futures Association. The CFTC is the regulatory agency of the government. In contrast, the NFA is a self-regulated agency that manages all things related to trading. To offer forex trading in the US, a brokerage firm must do two things:

  1. Get registered with the CFTC, and
  2. Be a member of the NFA

Another critical change that happened in 2010 was the imposition of a leverage cap when trading forex. The allowed leverage for main currency pairings is 1:50. For the exotic pairs, it is further down to 1:20. In contrast, the level used in Europe can be as high as 1:500 to 1:1.000. It also disallowed hedging. It is a strategy where the client opens two transactions on the same currency pair simultaneously. Both restrictions limit the amount of profit gained in forex. But it also puts a cap on the value lost. From a broader perspective, it limits the chances of these losses growing exponentially and causing another financial crisis.

Tax reform policies have also changed. It is now a requirement to file annual tax returns on profits gained in forex trading. It is a two-tiered policy where the first 60% of profits get classified as capital gains and the remaining 40% as regular taxable income. Capital gains tax is at 15%. The rest is computed based on the income bracket of the trader for all profits gained for the given tax year.

In addition, brokerage firms must now get a license from the authorities to operate. And have enough cash for the $20 million security deposit. It is a huge investment for brokers whose annual profit peaks at only 10$ million. It means sacrificing two years’ worth of profit to get a trading business license. To get a better perspective, the security deposit required in Europe is only between $100,000 to half a million dollars. This provision is one of the reasons why brokerage firms left the US market. Today, only a handful of brokers are operating in the United States of America.

Who are the top forex brokers in the US?

As a result of strict government regulations, the US has a limited number of forex brokers compared to Europe. But this is also a protection to traders against fraudulent or illegal brokerage firms. The first thing to look at is the regulation number and registration records of the company. Ensure that the name, address, and other details in their platform match with the records in the CFTC ad NFA. Some scammers use the first name of a registered company or misspell the letters to make people think that they are the same firm.

Here are the top 3 brokers in the US.

  1. IG is the number one CFD provider in the world today. It has more than 17,000 trading instruments available like forex, crypto, commodities, and shares. The benefits of using IG include tight spreads and fast trading executions. Support comes through an education program and round-the-clock support. IG also provides traders with a free demo account to practice and apply trading skills and strategies. Also, its trading platform is developed by traders, with fellow traders in mind as the final user. No wonder it bagged the best finance app award in 2020 by the International Financial Awards (ADVFN). It is a company regulated by US authorities.
  2. TD Ameritrade is the winner of the number one overall broker in 2021. It has kept this winning streak for three consecutive years already. TD Ameritrade has zero commission rates, no minimum deposits or hidden fees for clients who trade using its platform. Also, it offers a unique education program for beginners using AI or artificial intelligence. All clients also get access to intelligent trading platforms accessible through the web, the mobile app, and even from a smartwatch! If you want to expand and grow your trading portfolio, TD Ameritrade has a wide selection of investment options such as stocks, bonds, options, futures, and ETFs. The CFTC and NFA regulate this company.
  3. Forex.com is a market leader in forex since 2001. It has more than 90 currency pairs available in major, minor, and exotic currencies. Also, it has three trading platforms you can use depending on your trading style and personality. Choose among advanced trading, web trading, or mobile trading. In addition, members get free access to MetaTrader 5, an improved version of the most popular trading platform, the MT4. Forex.com has a global team of experts that analyzes the market and forecasts price fluctuations. And the most significant offer of Forex.com is the fast and convenient way of opening an account. It only takes 5 minutes to create your profile and start trading right away. Regulatory agencies gave it a thumbs up.

Who can trade in the US forex market?

In the US, both US citizens and non-citizens can do forex trading. But they must make forex transactions using a regulated broker. Also, they must pay the correct taxes. As mentioned, this includes a capital gains tax for the first 60% of profits. And for the remaining 40%, computed against the income bracket of the individual for the year. 

If you want to trade overseas from the US, the conditions differ for Americans and non-US citizens. For US investors, they are taxed based on the same rate as doing business here. It is the 60-40 rule we talked about earlier. But for foreigners, taxes are usually paid in the country where the trading happened. Consult your preferred brokerage firm on taxes and other obligations since most overseas brokers no longer have offices in the US.

Can you go to jail for Forex?

The trading of forex is legit and allowed in the US and other free economies in the world. Getting profit using a combination of trading skills, the right brokerage firm, and effective trading strategies will not result in a jail sentence. However, certain practices will mean fines and possibly jail time.

For example, if you do not declare profits and pay the correct taxes, the government can file a tax evasion case against you. It can result in the collection of penalties, imprisonment, or both. The penalties differ from country to country and state to state. If you are not sure, check with your broker or the local tax office. If you are lucky, you may even get tax relief or not get taxed at all. Some countries have relaxed tax collection policies. In this case, you can enjoy all the profit from forex trading for yourself.

Another common offense is involvement in forex trading scams. Schemes such as Ponzi or pyramid scams are criminal acts. When people pay for an exclusive membership to a program or club, and then recruit other people into the club in exchange for profit or commissions, that is a pyramid scam. It is a non-bailable offense so, you will spend a long time in jail if you get caught. The easy way to spot this scam is to observe their business profit model. If the recruiter is more interested in getting members than the actual trading of currencies, then you must stay away. Do not get involved in any way to avoid losing your money or sharing in the penalties. In this case, sure imprisonment and fines.

Is Forex banned in the US?

No, forex is legit and legal in the US. But forex trading is strictly regulated in the United States. It is why people think that it is not allowed in the country. The limitations set by the Dodd-Frank Act of 2010 are the basis of the standards used in the US. It includes:

  • Establishment of a leverage cap. The law sets the leverage limits to 1:50 for main currencies and 1:20 for exotic currency pairs. In other markets, the leverage can be as high as 1:1,000.
  • Mandatory filing of tax returns. All profits from forex trading should be declared and paid according to the guidelines. The first 60% of profits get taxed at 15%. And the rest of the 40% is taxed based on the income bracket of the trader for the year. In contrast, some countries do not require annual tax payments for forex trading.
  • A $20 million security deposit is required. It is one of the most restrictive requirements that caused some brokerage firms to leave the United States. This benchmark is very high compared to the deposits required in Europe that can be as low as $100 thousand only.

Is forex trading a pyramid scheme? 

Forex trading is not a pyramid scheme. It is a legit trading asset where one needs specialized skills and discipline to succeed. But some scammers managed to enter the world of forex to get the money off people through membership fees. These people are not trading currencies but only recruiting people. And they encourage members to find other traders in the program in exchange for commissions or fees.

Traders must study the market and be aware of these scams to avoid losing their hard-earned cash. Also, trading by yourself decreases the chances of getting scammed. Your money and account are at your disposal and not delegated to a private broker or individual. You will never know who the legit trader or the scammer is, so it pays to be cautious.

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