Forex taxation in Spain

Many fx trader fails to understand the importance of taxes. A common complaint I hear about trading is that you can’t grow your capital the way investors do because you take out a large chunk of your balance each month to cover your personal expenses. This is not only true but they don’t even take into account the tax they have to pay on their trading income which they should withdraw from their trading account as well.

To better understand how important is to pay the lowest percentage of your income in taxes, we’re going to compare a trader’s final account balance at the end of the year in a couple of different jurisdictions. First we’ll do the math for a typical Western country to illustrate the effects of a high income tax environment then we’ll do the same with a member state where the rate is lower but not the lowest possible and lastly we’ll calculate the balance with a jurisdiction where you pay very little taxes.

As you’re going to see, the tax you have to pay on your trading income plays a huge role in your financial freedom. If you live in a typical Western country then you may have to pay so much in taxes that you may not be able to grow your account because the money that you take out for your expenses plus the taxes are so much that you’re effectively working for a wage like an employee because you can’t grow your account thus your work has no benefit compared to a regular job.

I’m going to calculate with a €10,000 starting balance in all these examples and a theoretical 35% monthly net performance for a 12 months period. I’ve chosen 35% because realistically you need at least €2,000 per month (gross) for your expenses.

Let’s assume that our trader is wise and whenever he withdraws money from his account, he also puts money aside for taxes so he won’t worry about it when the time comes to pay. Since you can’t know your performance in advance, it’s possible that you only put aside 20% of your withdrawal each month but you earned more than you initially expected and you have to pay more at the end of the year. If this were to happen then you’d have to withdraw the missing balance from your trading account which would make it harder to grow your account. To avoid this from happening, our trader is going to set aside a percentage which equals to the highest marginal income tax rate to cover his tax liabilities. It’s important to note that in many countries you also have to pay a social security surcharge which is deductible for tax purposes.

Month	Starting balance	Profit	Gross withdrawal	Saved for income tax	Net withdrawal	Final balance
1	10,000	3,500	3,000	1,350	1,650	10,500
2	10,500	3,675	3,000	1,350	1,650	11,175
3	11,175	3,911	3,000	1,350	1,650	12,086
4	12,086	4,230	3,000	1,350	1,650	13,316
5	13,316	4,661	3,000	1,350	1,650	14,977
6	14,977	5,242	3,000	1,350	1,650	17,219
7	17,219	6,027	3,000	1,350	1,650	20,246
8	20,246	7,086	3,000	1,350	1,650	24,332
9	24,332	8,516	3,000	1,350	1,650	29,848
10	29,848	10,447	3,000	1,350	1,650	37,295
11	37,295	13,053	3,000	1,350	1,650	47,348
12	47,348	16,572	3,000	1,350	1,650	60,920

As you can see your account balance would grow to €60,920 at the end of the 12 months period which is not bad. However this is a gross amount, meaning that you have not paid taxes on it so let’s see how much you’d have to pay and what you’d have left once you have settled your obligations.

As a self-employed person you have to pay a 26.50% social security surcharge on the first €3,751.26 per month and everything above is free of this charge. This is deductible for income tax purposes. In the first two months you’d have to pay this surcharge on your entire income but in the next 10 months only on some of it because of the capped system. Your total liability would be €11,842.21 for the year.

Now let’s see the income tax. In Spain there are five different income tax brackets starting with 19% and going as high as 45%. There is also a wealth tax in Spain but it’s not applicable in Madrid so let’s assume that our trader lives there and he can avoid that tax.

Before we could begin calculating the trader’s tax liability, we have to determine the taxable income. To do this, we have to add the monthly profit in all of the 12 months and we have to withdraw the social security surcharge. By doing this we get €75,077.79. Now let’s see how much he has to pay on this amount.

In the first bracket, he has to pay 19% on the first €12,450, then 24% up to €20,200, followed by a 30% rate up to €35,200, then 37% up to €60,000 and 45% on everything above.

Add these numbers together and the final tax liability comes to €24,686.51 but you have to add the social security to get the total number that you have pay which is €36,528.72.

Considering that our trader has earned €86,920, this represents a ~42.03% effective tax rate including the social security charge.

Since the trader saved 50% of his monthly withdrawal for his future tax liability, he has not to worry about taxes on the money he already had spent. He will have to withdraw only €24,528.72 from his trading account to pay the taxes because he already have €12,000 saved from his monthly withdrawals.

At the end of the 12th month, his final account balance would be €36,391.28. In other words even though he earned a consistent 35% profit each month, once we have deducted the taxes and his moderate living expenses, his effective performance was only about 11.4% per month. He was living modestly from the €1,650 per month and bought no expensive products and assumingely rented a small flat far from the city center.

In the next part we’ll take a look on another EU member state and compare our trader’s performance and final balance with this one.