Massive growth in the global foreign currency exchange (forex) markets has attracted the interest of traders and investors alike. With a plethora of currencies available and trade volumes running into the trillions of dollars, forex markets provide a convenient way to take advantage of inherent leverage and volatility and to make handsome returns. Many traders have started opening offshore forex accounts in foreign jurisdictions because of favorable tax treatments in these locations and to overcome overly restrictive regulations in their own country (like the Foreign Account Tax Compliance Act or FATCA in the United States).
Let us look at how a US-based investor can open an offshore forex account:
- U.S. citizens seeking to trade forex markets often open brokerage accounts overseas due to more favorable tax treatment and more generous leverage and access to more products.
- While this is legal, traders that choose this option must make sure they disclose their activity to the IRS and are in compliance with U.S. regulations such as FACTA.
- You will likely need to provide information and documents to the new broker to prove your identity.
- As with any new broker account, do your research to make sure your brokerage is regulated, trustworthy, and low-cost.
Steps To Open An Offshore Forex Account
Pick a Forex Broker
The first step towards opening an offshore forex account is selecting a broker. There are numerous sites which rate the best international forex brokers such as Forex Brokers Review. Some things to keep in mind while selecting a broker include fees and commissions, the minimum balance required to operate and fund the account, capabilities of customer service staff, etc. It is important to ensure that the broker meets all requirements and standards set by Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) and complies with the local offshore laws. This will help avoid running into regulatory issues later on.
Opening and Operating the Forex Account
The documentation involved in opening an offshore forex account is relatively straightforward these days, with minor variations per the regulations of the offshore country. Most brokerages will make their first-time customers fill out a terms and conditions agreement and a customer trading form.
A notarized passport copy and other forms of identification (e.g. bank statements, credit card statements, utility bills, etc.) confirming the address of the applicant are generally required. Some brokers provide the flexibility of operating the forex account with a minimum amount of as little as $100.
Alternatives for Forex Investing
For investors with a sizeable amount to invest ($100,000), opening an offshore international business corporation (IBC) or an offshore trust might be a more profitable option. An IBC is one of the most flexible and safe methods for offshore forex investing. Establishing an IBC is a little costly upfront (~$1500), but it frees the investor from onerous reporting requirements and the costs can be recouped early through tax savings. It also allows an investor to trade forex any way he or she wishes.
Disclosures and Legal Compliance
It is of utmost importance to check whether the selected broker and the types of forex trades the investor intends to carry out in the chosen jurisdiction are all in compliance with the legal and regulatory bodies of the home country. For US investors, the Treasury’s Foreign Account Tax Compliance Act (FATCA) governs investing and banking overseas. According to FATCA, foreign financial institutions (FFIs) are required to provide information about US citizens invested in offshore accounts outside the US to the Internal Revenue Service (IRS). FATCA-compliant FFIs can be viewed here: FATCA FFIs.
The Bottom Line
With the ongoing integration of the global financial markets, opening an offshore forex account is not a daunting task anymore. Retail investors should keep in mind their relative information disadvantage and the inherent volatility in the forex market which may lead to huge losses. If opting for an offshore account, investors should aim to thoroughly understand the legal, tax, and regulatory implications both in their home country and in the offshore location.