US-Friendly Forex Brokers

Opening a US-Friendly Forex Account

For us to understand the basis of opening a US-friendly forex account, we need to understand the background behind this concept, and this will take us to the taxation policies and brokerage account requirements that are required of US citizens and residents in opening forex trading accounts.

The US tax law known as the Foreign Assets Tax Compliance Act (FATCA) empowers the Inland Revenue Service (IRS) to tax all assets of citizens of the United States at home and abroad. This includes investments and proceeds of trading activities in brokerage accounts held outside the shores of the United States.

In addition, there are provisions in this law that empowers the IRS to exert a 30% withholding tax on non-compliant foreign firms that have branches in the United States. In order to avoid having complications with the IRS as regards the business concerns of their branches in the US, many forex brokers have stopped accepting business from United States citizens. Brokerages that have branches in the US prefer to send all their US account applications to those branches, where the proceeds of trading profits are taxed from source. Brokers who have no branches in the US do not accept forex brokerage account applications from US citizens.

The situation has been further compounded by the implementation of the new margin requirements for all US trading accounts. Effective October 2010, the Commodities and Futures Trading Commission (CFTC) requires all forex accounts operated in the United States to implement a maximum leverage of 1:20 for forex accounts and 1:5 for options trading accounts. In essence, a trader wishing to trade Standard Lot contracts worth at least $100,000 will be required to put up capital of up to $5000 for that trade. Considering that this is just the requirements for a trade, it means that retail forex traders are expected to either step down their account types to micro or mini lot accounts, or significantly increasing their trading capital to be able to trade standard lots.

From this brief explanation above, we can describe a US-friendly forex account as:

1)      One that is opened with a broker domiciled in the United States.

2)       A forex account that is configured to trade with a maximum leverage of 1:20.

3)      A forex account that is subject to the relevant taxation under the provisions of the extant tax laws.

In order to make your account a US-friendly forex account, you would need to open a forex account with a broker who has offices in the US and who can accept your forex application. This will require that the trader has a Tax ID number and Social Security Number (SSN), as you will be asked for this information when opening the account. The Tax ID number will ensure your profits are taxed by the IRS.

Once your account is opened, you need to decide if you have the financial muscle to withstand the leverage and margin requirements as directed by the CFTC. There are three account levels:

–          Micro account, where the minimum trade contract is 0.01 lots or $1000.

–          Mini account where the minimum trade contract is 0.1 lots or $10,000.

–          Standard account which allows the trader to trade Standard lots worth at least $100,000.

The universally accepted risk for forex trading is 5% of account size. This means that anyone trading a Standard contract which will demand $5000 of trading capital must have an account with a minimum of $100,000. Such traders can also trade mini-lots on their accounts, so the trader can open an account with $10,000 and restrict his trading to 0.1 lots, or still maintain $100,000 and trade from 0.1 lots to a maximum of 1 lot. If the trader is aiming to trade larger contracts, then the account must be capitalized accordingly.

Many retail traders will not have access to such large sums of money, so the mini and micro lot accounts will be the way to go for this category of traders in order to make their accounts US-friendly forex accounts.