Forex represents an exciting opportunity for Indonesians. It offers the possibility of day trading for daily profit or finding long-term opportunities by swing trading. Like many countries, there are regulatory and tax obligations for those who trade in the financial markets, including Forex.
In this article, I will explore how Forex works and the tax obligations that Indonesian traders must meet.
Let’s cover the most important aspects of Forex.
- Forex trading involves buying one currency and selling it against another. For example, if I buy the Euro and sell the US Dollar against it, I have bought the Euro / US Dollar currency pair, or EURUSD. All Forex trading involves two currencies. The industry uses the term “currency pair” or “forex pair” to refer to two currencies in a trade.
- Forex is an over-the-counter (OTC) market without a central exchange. The price I see on my charting platform is from the brokers or their liquidity providers, usually the big banks that trade currencies. “Direct market access” or non-dealing brokers (NDDs) forward client orders directly to their liquidity providers and charge a commission for the service. Other brokers conduct business using an in-house dealer desk. These are “Market Maker” brokers who make money on the spread. Brokers with “direct market access” also have a spread, but it is a spread from their liquidity providers.
- Forex trading uses the spot price. “Spot” means current value, not future value. The opposite of a “spot contract” would be a “futures contract”, where the contract is for a specific price at a future date.
- The first currency in the pair is the base currency and the second is the quote currency. For example, for EURUSD, the euro is the base currency and the US dollar is the quote currency. The forex industry has standardized the order in which each currency appears, so that it is always EURUSD and never USDEUR.
- The price of a Forex pair is the number of units that the quote currency is worth for 1 unit of the base currency. When the price of a Forex pair rises, the base currency becomes more expensive compared to the quoted currency. If the price decreases, the base currency becomes cheaper compared to the quote currency. For example, if USDCAD is 1.3500, 1 US dollar can buy 1.3500 Canadian dollars. If the GBPUSD price is 1.2500, 1 British pound can buy 1.25 US dollars.
- A “pip” is a unit of price movement for a Forex pair. For example, if the GBPUSD price moves from 1.2500 to 1.2510, it has moved 10 pips.
- Forex pairs have a bid/ask spread. If the GBPUSD buy price is 1.2510 and the sell price is 1.2508, the spread is 2 pips. The spread is how the broker or liquidity providers make money.
- Forex is traded in “lot” sizes: standard, mini, micro and nano lots.
- 1 standard lot = 100,000 units of base currency
- 1 mini lot = 10,000 units of base currency (or a tenth of a standard lot)
- 1 micro lot = 1,000 units of the base currency (or a hundredth part of a standard lot)
- 1 nano lot = 100 units of base currency (or one thousandth of a standard lot)
- Forex major currency pairs are currency pairs that contain the US dollar and the currency of another major economy. There are seven main Forex pairs:
- EURUSD (Euro/US Dollar)
- USDJPY (US Dollar/Japanese Yen)
- GBPUSD (British pound/US dollar)
- USDCHF (US Dollar/Swiss Franc)
- AUDUSD (Australian dollar/US dollar)
- USDCAD (US dollar/Canadian dollar)
- NZDUSD (New Zealand Dollar/US Dollar)
- Forex trading is with the help of leverage. Trading leverage refers to a tool that ensures that I do not need the entire value of a lot to trade a currency pair. For example, if I buy one mini lot of USDJPY, the “notional value” of the trade is US $10,000. However, if I have a leverage of 20:1, I only need a twentieth of that as “margin” for the placement, ie. 500 dollars. Leverage increases my profit because I need less money to trade more currency. However, leverage increases all losses equally. For this reason, traders describe leverage as a “double-edged sword”.
- The most popular platform for Forex traders is MetaTrader versions MT4 and MT5. Almost all Forex brokers offer their clients MetaTrader for charting Forex pairs and placing trades. It is easy to learn and has many technical analysis tools and time frames, e.g. 5-minute charts to monthly charts.
- Forex traders use technical and fundamental analysis to make trading decisions. Technical analysis looks at price and volume patterns. Fundamental analysis examines news and economic data, such as a country’s gross domestic product, interest rate announcements, etc. Some traders will use only technical or fundamental analysis, while others will combine the two approaches. The economic calendar helps to know the upcoming schedule of economic announcements for trading planning, even for technical traders, as big news always moves the markets.
- The Forex market is open 24 hours a day, 5 days a week. Some parts of the day are more active than others. For example, the “New York Open” at 8am ET is the most active period for most USD-based forex pairs.
- Have a trading plan that includes entry, exit and stop loss rules to control risk. Some traders copy trading signals, while others develop their own trading methods. In any case, the strategy should have three rules: when to enter a trade, when to take profit, and when to exit if the trade goes against you. For example, I wouldn’t follow a signal provider if they kept losing indefinitely without an exit plan. Reward/risk ratios are key in profitable trading – a positive ratio is when the value of the gain is greater than the potential loss for the trade.
- Trade first on a demo account. The best Forex brokers in Indonesia allow clients to download their trading platform and test trades to see if they are profitable before committing to a real money account. New traders should always trade on demo accounts to make sure they can make money and overcome any mistakes that would otherwise be costly with real money.
To answer the question, I will make two assumptions:
- You trade as an individual, ie. not as a corporation and not for business activities, such as currency trading because you import or export goods. In other words, you are trading purely for speculative purposes to make money on the price change between two currencies.
- You are a tax resident of Indonesia. Criteria include being physically present for more than 183 days in 12 months or intending to stay for more than 183 days even if you don’t. Other areas that may affect tax status are permanent residence in Indonesia, employment with an Indonesian entity or significant business interests in Indonesia.
Assuming you trade as an individual and are a tax resident of Indonesia, Direktorat Jenderal Pajak (DJP) taxes Forex profits at your income tax rate:
- Up to IDR 60 million: 5%
- IDR 60 million to IDR 250 million: 15%
- IDR 250 million to IDR 500 million: 25%
- Over IDR 500 million: 30%
The personal income tax rate is calculated on the gross income minus the allowed deductions and exemptions. You cannot write off Forex losses against personal income tax.
There is no legal way to avoid paying income tax on Forex profits in Indonesia. The Indonesian government can issue a number of measures for failure to pay income tax, including penalties and interest. Authorities can also file criminal charges for serious tax evasion and seize property for significant tax arrears to collect the debt.
- Keep detailed records of your Forex activities for tax purposes. This can help to avoid accidental non-payment of debt, which can result in fines from the Directorate of Jenderal Pajak.
- Find out what exemptions and deductions are available from your income tax.
- If in doubt, consult a tax professional.
The Forex market offers plenty of opportunities to earn extra income in a way that fits your schedule as it operates 24 hours a day, 5 days a week. The leverage aspects of Forex allow traders to start with small amounts of money and even practice on demo accounts first to make sure they are profitable. Forex takes time and practice, so put in the effort to learn. Indonesians pay personal income tax on Forex profits, and there is no legal way to avoid it.