How to Sell Money and Profit From Currency Trading

Buying and selling currencies for profit, known as currency trading or forex trading, involves capitalizing on exchange rate fluctuations. Traders seek to buy a currency at a lower price and sell it at a higher price, profiting from the difference. The forex market operates 24 hours a day, five days a week, making it one of the most liquid financial markets.

Exchange Rate Mechanisms

The value of one currency against another is determined by various factors in the foreign exchange market. Understanding how exchange rates are set and the pricing structures used by financial institutions helps traders make informed decisions.

Market Pricing

Exchange rates fluctuate based on supply and demand. When demand for a currency rises, its value increases; when demand falls, its value declines. Economic indicators such as inflation, interest rates, and geopolitical events influence these movements. Central banks also impact currency values through monetary policies, such as adjusting interest rates or intervening in the market.

The foreign exchange market operates electronically through a decentralized network of banks, financial institutions, and individual traders. There is no central exchange where all trades occur. Traders monitor economic reports and financial news to anticipate price movements.

Interbank Rates

Major financial institutions trade currencies with each other in the interbank market at wholesale rates, which are generally more favorable than those available to individual traders. These rates depend on trading volume, market conditions, and credit risk. Large multinational corporations and institutional investors often access interbank rates for international transactions, hedging, or portfolio diversification.

Retail traders and small businesses do not typically have direct access to interbank rates, as banks add a markup when offering exchange services. Understanding interbank pricing helps traders assess whether the rates they receive from brokers or financial institutions are competitive.

Retail Spreads

Individual traders and small businesses exchange currency through brokers, banks, or money exchange services, which apply a spread—the difference between the buying and selling price. The size of this spread depends on market liquidity, transaction size, and the provider’s pricing model.

During periods of high volatility, spreads can widen as providers adjust pricing to account for increased risk. Online forex brokers often offer tighter spreads than traditional banks due to lower overhead costs. Some brokers also charge additional fees or commissions, which should be factored into potential profits. Comparing spreads across providers helps traders minimize costs.

Spot and Forward Transactions

Currency trading involves two primary types of transactions: spot and forward contracts. Spot transactions involve the immediate exchange of currencies at the current market rate, while forward contracts allow traders to lock in an exchange rate for a future date.

Immediate Settlement

A spot transaction is a straightforward currency trade where two parties exchange one currency for another at the prevailing market rate. Settlement typically occurs within two business days, except for USD/CAD trades, which settle in one business day. The price at which the trade is executed is known as the spot rate.

Spot transactions are commonly used by businesses and individuals who need to convert currency for immediate use, such as international trade payments or travel expenses. Since the exchange rate is determined at the time of the trade, there is no risk of future price fluctuations affecting the transaction. However, speculative traders must account for transaction costs, including spreads and brokerage fees, which impact profitability.

Contractual Obligations

A forward contract is a binding agreement between two parties to exchange a specified amount of currency at a predetermined rate on a future date. These contracts help businesses and investors hedge against currency fluctuations. They are customized in terms of amount and settlement date, allowing flexibility in managing foreign exchange exposure.

For example, an importer expecting to pay €500,000 for goods in six months may enter into a forward contract to lock in the current exchange rate, protecting against potential depreciation of their domestic currency. While this eliminates uncertainty, it also means the trader is obligated to complete the transaction, even if market rates move favorably.

Forward contracts are typically offered by banks and financial institutions, with pricing based on interest rate differentials between the two currencies. Since these contracts are not traded on an exchange, traders should assess counterparty risk, as the financial stability of the institution issuing the contract is a factor.

Settlement at a Future Date

The settlement of a forward contract occurs on the agreed-upon future date, at which point the currencies are exchanged at the pre-determined rate. Unlike futures contracts, which are standardized and traded on exchanges, forward contracts are private agreements tailored to specific needs.

Upon settlement, the trader must deliver or receive the agreed-upon currency amount unless the contract is cash-settled, meaning only the difference between the contract rate and the prevailing market rate is exchanged. Some traders choose to roll over forward contracts by entering into a new agreement upon expiration, extending their hedge or speculation strategy. However, rolling over may involve additional costs, such as interest rate adjustments or fees imposed by the financial institution.

Forward contracts are widely used by multinational corporations, exporters, and institutional investors to manage currency risk. While they provide certainty in exchange rates, they also limit potential gains if the market moves in a favorable direction.

Calculating Gains and Losses

Profitability in currency trading depends on accurately determining gains and losses from transactions. Since exchange rates fluctuate constantly, traders must track the difference between the purchase and sale price of a currency while factoring in associated costs.

The most common way to measure profit or loss is by calculating the difference between the entry and exit exchange rates, multiplied by the trade size. For example, if a trader buys €10,000 at an exchange rate of 1.10 USD/EUR and later sells at 1.12, the gain would be $200 (10,000 × (1.12 – 1.10)). Conversely, if the rate drops to 1.08, the trader incurs a $200 loss.

Beyond direct price movements, trading costs such as spreads, commissions, and financing charges impact overall profitability. Many brokers charge a spread between the bid and ask price, reducing potential gains. For leveraged trades, overnight financing fees apply if positions are held beyond a trading session, as brokers lend funds to traders at prevailing interest rates. These costs accumulate over time, meaning a trader’s net profit may be lower than the gross amount calculated from exchange rate differences.

Exchange rate fluctuations can also lead to unrealized gains or losses. If a trader holds a position without closing it, market movements affect its value but do not result in an actual profit or loss until the trade is exited. This is particularly relevant for margin accounts, where unrealized losses may trigger margin calls requiring additional funds to maintain the position. Traders should monitor their account balance closely to avoid forced liquidations.

Tax Obligations

Earnings from currency trading are subject to taxation, but the specific treatment depends on jurisdiction, trading frequency, and whether the trader is classified as an individual investor, a professional trader, or a business entity.

In the United States, forex traders typically fall under either Section 988 or Section 1256 of the Internal Revenue Code. Section 988 applies to most retail traders and treats currency trading gains as ordinary income, taxed at the trader’s marginal tax rate, which can be as high as 37% for high earners. However, traders who qualify for Section 1256 treatment can receive a more favorable tax structure, with a 60/40 split—60% of gains taxed at the long-term capital gains rate (maximum 20%) and 40% at the short-term rate.

Eligibility for Section 1256 treatment often depends on whether the trader deals in currency futures or certain options contracts rather than spot forex transactions. Electing this tax treatment requires filing an internal election with the IRS before the tax year begins. Traders operating through business structures, such as LLCs or S corporations, may have different tax obligations, including self-employment tax considerations and deductions for trading-related expenses.

Recordkeeping for Currency Sales

Maintaining accurate records of currency transactions is necessary for tracking profitability, meeting tax obligations, and ensuring compliance with financial regulations. Traders must document details such as trade dates, currency pairs, transaction amounts, exchange rates, and associated costs.

Digital trading platforms typically provide trade history reports, but relying solely on broker statements may not be sufficient. Traders should maintain independent records, including spreadsheets or accounting software entries, to track realized and unrealized gains, fees, and margin requirements. Keeping copies of bank statements, wire transfer receipts, and correspondence with brokers can help resolve disputes or verify tax filings. Some regulatory authorities require traders to retain records for a specific period, such as the IRS’s recommendation of at least three years for tax-related documents.