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Forex presents an exciting opportunity for Indonesians. It offers the ability to day trade for daily profits or find longer-term opportunities by swing trading. Like many countries, there are regulatory and tax obligations for those trading the
financial markets, including Forex.
In this article, I will explore how
Forex works and the tax obligations that Indonesian traders must meet.
Top Forex Brokers1 Get Started 74% of retail CFD accounts lose money What Is Forex?
Let's cover the most essential 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 the two currencies in the trade.
Forex is an Over-the-Counter (OTC) market without a central exchange. The price I see on my charting platform is from the broker or their liquidity providers, usually major banks that trade currencies.“Direct Market Access”, or non-dealing desk (NDD) brokers , pass client orders directly to their liquidity providers and charge a commission for the service. Other brokers fill trades using an internal dealing desk. These are “Market Maker” brokers that make money on the spread.“Direct Market Access” brokers also have a spread, but it is the spread from their liquidity providers.
Forex trading uses the spot price.“Spot” means the current value rather than a future value. The opposite of a“spot contract” would be a“futures contract,” where the contract is for a specified price at a future date.
The first currency in a 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 it is always EURUSD and never USDEUR.
The price of a Forex pair is the number of units the quote currency is worth for 1 unit of the base currency. When the price of a Forex pair goes up, the base currency becomes more expensive relative to the quote currency. If the price decreases, the base currency becomes cheaper relative to the quote currency. For example, if USDCAD is 1.3500, 1 US Dollar can buy 1.3500 Canadian Dollars. If the price of GBPUSD 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 price of GBPUSD moves from 1.2500 to 1.2510, it has moved 10 pips.
Forex pairs have a bid/offer spread. If the buy price of GBPUSD is 1.2510 and the selling price is 1.2508, the spread is 2 pips. The spread is how the broker or liquidity providers earn money.
Forex is traded in“lot” sizes: Standard, Mini, Micro and Nano lots.
1 standard lot = 100,000 units of the base currency 1 mini lot = 10,000 units of the base currency (or a tenth of a standard lot) 1 micro lot = 1,000 units of the base currency (or a hundredth of a standard lot) 1 nano lot = 100 units of the base currency (or a thousandth of a standard lot)
Forex majors are currency pairs containing the US Dollar and a currency from another major economy. There are seven Forex major 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 leveraged. Leverage in trading refers to a tool that ensures I do not need the entire lot value to trade the 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 20:1 leverage, I only need a twentieth of that as a“margin” to place the trade, i.e., $500. Leverage amplifies my profits because I need less money to trade a larger quantity of currency. However, leverage equally amplifies any losses. For that reason, traders describe leverage as a“double-edged sword.”
The most popular platform for Forex traders is MetaTrader versions MT4 and MT5 . Nearly all Forex brokers offer MetaTrader for their customers to chart Forex pairs and place trades. It's easy to learn and has plenty of technical analysis tools and timeframes, e.g., 5-minute charts up to monthly charts.
Forex traders use technical and fundamental analyses 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, and others will combine the two approaches. An economic calendar helps to know the upcoming schedule of economic announcements to plan trades, 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” from 8 a.m. Eastern Time is the most active period for most US Dollar-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 trading methods themselves. Either way, a strategy should have three rules: when to enter a trade, when to take profits, and when to exit if the trade goes against you. For example, I would not follow a signal provider if they held losing trades indefinitely without an exit plan. Reward/risk ratios are crucial in profitable trading-a positive ratio is when the value of the profit is greater than the potential loss for a trade.
Trade on a demo account first. The best Forex brokers in Indonesia let clients download their trading platform and test transactions to see if they are profitable before committing to a real-money account. New traders should always trade on demo accounts to ensure they can make money and conquer any mistakes that would otherwise be costly with real money Are Forex Trading Profits Taxed in Indonesia?
To answer the question, I will make two assumptions:
You are trading as an individual, i.e., not as a corporation and not for business activities, such as trading a currency because you are importing or exporting goods. In other words, you are trading purely for speculative purposes to make money on the change in price between two currencies.
You are a tax resident of Indonesia. The criteria include physical presence of more than 183 days in 12 months or the intent to stay more than 183 days even if you do not. Other areas that can affect tax status are having a permanent domicile in Indonesia, being employed by an Indonesian entity, or having significant business interests in Indonesia.
Assuming you trade as an individual and are an Indonesian tax resident, the 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 gross income minus allowable deductions and exemptions. You cannot write off Forex losses against personal income tax to Avoid Tax on Forex Trading in Indonesia
There is no legal way to avoid paying income tax on Forex profits in Indonesia. The Indonesian government can issue a series of measures for not paying owed income tax, including fines and interest. The authorities can also file criminal charges for severe tax evasion and seize assets for significant tax arrears to recover the amount owed.
Tax Planning Strategies for Forex Traders
Keep detailed records of your Forex activities for tax purposes. This can help avoid accidentally not paying taxes owed, which can result in penalties from the Direktorat Jenderal Pajak.
Know what exemptions and deductions are available against your income tax.
If in doubt, consult a tax professional Line
The Forex market offers plenty of opportunities to earn extra income in a way that suits your schedule because 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 to practice on demo accounts first to ensure they are profitable. Forex takes time and practice, so spend the effort to learn. Indonesians pay personal income tax on Forex profits, and there is no legal way to avoid doing that.
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