More than 100 Japanese retail traders have been penalised by tax authorities in the last half of 2006 for failing to declare JPY2 billion in profits earned through foreign exchange margin trading.
The law in Japan states that profits earned through FX margin trading is taxable as an individual’s miscellaneous income. However, according to the Daily Yomiuri citing unnamed sources, most of the investors who were warned by the authorities had not reported any profit earned through FX margin trading. Also, some investors had traded under false names.
Margined foreign exchange trading is conducted in Japan either over-the-counter or via an exchange traded currency futures markets known as Click 365 offered by the Tokyo Financial Exchange.
Dealers who participate on Click 365 are required to submit transaction records to the tax authorities but OTC brokers are not. According to the Daily Yomiuri, of the 190 registered margined foreign exchange brokerage firms, only 11 participate in Click 365 making it difficult for the tax authorities to know how much profit each investor makes through such transactions.
According to the report, some foreign exchange brokers advised several of the investors who were given penalty taxes that the authorities would not discover their non-disclosures as the brokers were not obliged to submit transaction reports.
Some said they decided not to report profits because they could use them to cover previous losses made on FX margin trading.