Updated on July 18, 2023
Buying forward refers to a financial transaction where an individual or entity agrees to purchase an asset or commodity at a predetermined price for future delivery. It allows the buyer to secure the price of the asset in advance, protecting against potential price fluctuations in the future.
Tax implications of buying forward
When you buy forward, there are generally no immediate tax implications at the time of the purchase. Taxation comes into play when the forward contract is settled and the asset is delivered.
Capital gains taxation – Any gains or profits made from the price difference between the purchase price and the market price at the time of settlement may be subject to taxation.
Treatment as capital gains – The gains or profits from buying forward are typically treated as capital gains for tax purposes.
Holding period – The holding period, which refers to the length of time the asset is held, may impact the tax rate applicable to the capital gains.
Applicable tax rates – The tax rates for capital gains depend on the holding period and the type of asset being bought forward.