In short - spread betting profits are generally not taxable in the UK. Profits from trading CFDs however, are taxable
However, there may be exceptions to these rules, as outlined below.
There is a ‘grey area' within the complex topic of this question. In the U.K., there are three types of tax (income, corporation and capital gains) that in various cases will be the basis of taxation of profits from Forex trading. Forex traders are also categorised as different trader types which can affect the basis on which their Forex trading profits will be taxed.
The first step in answering the question of whether an individual will pay tax on Forex trading in the U.K. is to assess the status of the trader, look at the instruments traded, and then determine the style and intentions behind the trading activity.
This can be confusing at times, which is why each trader should always seek their own independent financial advice from a professional accountant or consult with HMRC (Her Majesty’s Revenue and Customs, i.e. the tax office) to receive guidance, although unfortunately many traders report that HMRC is not as helpful as they had hoped for.
The Forex Trader’s Taxable Status
Broadly speaking, there are two reasons you are ‘trading’ Forex (different to ‘exchanging Forex’):
1. To speculate or gamble
OR
2. To invest (to increase the performance of your daily, weekly or annual returns, directly or indirectly).
1. The Speculator Gambler
This Forex trader fancies the occasional punt and will spontaneously place trades with no real consistent method or system behind the decisions. This type of trader usually will have other forms of income. Any additional income received from Forex trading would be considered secondary, therefore they would not be liable to pay any tax on profits and would effectively be able to trade tax-free in the U.K.
2. The Investor
This type of trader treats trading as a business. An investor treats Forex trading as his or her main source of income, or their main source of income somehow derives from trading activity, in which case, they would be liable to taxation of profit on the basis of either income, capital gains or corporation tax.
So, we can see that the first question that needs to be resolved is what type of trader you are: a speculator/gambler, or an investor.
It is worth noting however, that this alone cannot be used to determine your tax liability. Other factors outlined below are the next issues to be considered.
Top Forex Brokers
Are Profits from Spread Betting and CFDs Taxable in the UK?
There are various types of instruments available as wrappers from most Forex brokers when trading Forex. For retail Forex traders, the two main products offered to UK clients are ‘spread betting’ and ‘CFDs’.
This is the second factor that comes into play: the type of instruments you trade which make you your profit.
Let’s look at how these products differ and review the different U.K. tax implications of trading them.
Spread Betting
Spread betting is the simpler way to trade. It is also the easier out of the two to understand for beginners.
With spread betting you are simply betting on the direction of the price, at a certain amount per point, for example, you bet that GBP/USD will rise at £1 per pip.
This type of bet is considered speculation/ gambling and is, therefore, free of any capital gains tax.
CFDs
These are somewhat more complicated. With CFDs you size your trade according to ‘lots’, for example 1 lot of a major currency pair is typically worth $10 per pip. Note that most retail Forex brokers offer trading in units as low as mini-lots, with one mini-lot equal to 0.01 lots.
Also, in CFD trading, the base currency of your bet is determined by the underlying instrument you are betting on, while in spread betting all bets are denominated in your account’s base currency.
Most Forex brokers offering CFD trading also impose an additional trade when converting your profit or loss back to the original currency of your account, which adds another dimension to your profit or loss. For example, if your account’s base currency is GBP, but you make a profit of 10,000 Japanese Yen, your broker will usually credit you with the Yen profit at the end of the day, converting it into GBP at its prevailing GBP/JPY price at the moment of conversion.
CFDs are typically traded with a longer time frame in mind than spread betting, hence a CFD position is considered ‘capital’ and is, therefore, generally subject to capital gains tax.
Personal Circumstances of Forex Traders
As mentioned previously, when tackling the question ‘do I pay tax on Forex trading in the UK’, three major factors have to be examined. We have already covered the first two.
The last factor which needs to be considered is the most complex and requires an analysis of the personal finances and circumstances of the individual Forex trader combined with an examination of the trading activity that occurred which created the profit.
HMRC will consider the following issues in assessing your personal circumstances:
- Whether you pay tax or not on the remainder of your income (if any).
- If you are liable to pay tax, which tax you pay and how much.
- Salary bracket - whether you earn more or less than GBP 50,000 annually.
- Whether you are a limited company, part of a corporation or self-employed.
- Whether you have employees and the role they play in your profit.
- Products or assets involved (CFDs of spread bets).
- Frequency and quantity of your trades.
- Duration of your trades (time between the opening and closing of positions).
Therefore, although you may be confident of how you should be taxed on your Forex trading profits as a U.K. resident taxpayer, HMRC may see it differently and may ask more detailed questions to arrive at a decision. This is why it is important, especially in cases where the circumstances do not appear clear-cut, to take advice from a professional accountant or tax advisor. If you think it isn’t worth the cost because your profits are modest, it is a good idea to put aside the taxes you would pay in the worst-case scenario so if you do get a bill from HMRC you will be able to pay it.
Is Forex Trading Tax-free in the UK?
After researching this question in depth, we can conclude that if you are spread betting in the U.K. as an amateur trader, any profits you make from Forex trading will not be subject to a tax demand from the HMRC.
Compared to the E.U. and the U.S.A., the UK’s tax laws for Forex traders are seen as some of the friendliest in the world.
If you bear in mind that about 70% of all retail Forex traders lose money, however, it is easy to understand why HMRC would not want these losses to be offset against income gained from other sources, which explains why they have not moved towards a completely law position.
