Answer
that depends on country to country. Usually Forex traders receive a significant tax advantage over securities traders under Section 1256: reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles) allows you to split your capital gains on Schedule D, with 60% taxed at the lower long-term capital gains rate (currently 15%) and 40% at the ordinary or short-term capital gains rate of up to 35%. That combined rate of 23% amounts to a 12% advantage over the ordinary (or short-term) rate.

Tax reporting for Forex traders can be rather complicated. Even the IRS does not yet have a clear process. It is best to contact a tax expert who specializes in Forex issues.

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Do you have to file taxes on capital gains when trading Foreign Currencies(FOREX)?

If so how?

Do you need to pay taxes annualy based on gains and losses according to your account balance, or do you only pay taxes on gains when you withdraw the money from the account?

Answer
You do not pay according to either your account balance or when you withdraw money from the bank. You will pay according to the gain or loss on your transactions.

You can choose to have your gains and losses treated as ordinary gains and losses (IRC Section 988). This is the default treatment.

Alternately, you can choose to have your transactions treated as commodity exchanges (IRC Section 1256). This results in a 60-40 split in gains between long-term and short-term capital gains treatment. The Section 1256 treatment is more beneficial for gains.

If you choose the commodity option, you figure your gains and losses using Form 6781 which is then transferred to Schedule D. See the source for a beginning reference regarding this topic.