We developed this guide for UK residences to answer the basic tax fundamental questions regarding spread betting. Our overview of the UK tax laws also discussed how to report your trading income to the HMRC and other reporting matters.
Forex Trading, Spread Betting, And UK Tax Law
HRMC uses four regimes to assess taxes on day trading profits. Knowing the basics can help you structure your activity to maximise your profits whilst minimising your tax obligations.
- Income Tax – tax paid on overall earnings by private individuals
- Capital Gains Tax – tax paid on profits realised when you sell assets (shares)
- Stamp Duty Reserve Tax – tax paid when you buy shares
- Corporation Tax – tax paid on earnings by limited liabilities companies
We’ll focus primarily on the income tax and capital gains tax regimes since many forex traders operate as professionals rather than speculators.
1. What Kind of Trader Are You?
Whether HMRC considers you a speculative punter or a professional has significant implications for your tax bill. Someone who makes trades the same way others play poker enjoys tax-free gains as a professional gambler but also suffers the consequence of any losses. A business trader or full-time investor will pay taxes on earnings; however, losses are deductible.
2. Forex Taxes: Spread Betting and CFDs
Once you’ve determined which tax scheme applies to your situation, you’ll need to consider the type of trading product associated with each transaction.
If you engage in financial spread betting, you won’t pay capital gains tax or Stamp Duty Reserve Tax on any profits because you don’t own the underlying assets. However, HMRC considers this type of trading activity a form of betting, so you’ll need to report this income as gambling winnings. Note that this applies whether you’re spread betting equities, ETFs, or other financial instruments.
If you trade Contracts for Difference (CFDs), you’ll follow the same rules as individuals trading in bitcoin, binary options, and other commodities contracts. That means paying capital gains tax and the Stamp Duty Reserve Tax on any earnings.
3. Your Tax Status
You’ll pay personal income taxes on your forex trading gains if you’re trading shares as a secondary income source and haven’t set up a limited company or registered as a sole trader. If, on the other hand, trading serves as your main source of income, you’ll need to register as self-employed with HMRC and pay personal income tax on your profits.
If you’re a professional trader and use a limited company for your investment activity, you’ll need two tax returns. One for the company, which will pay taxes on trading revenue, and another for yourself, where you’ll pay income taxes on any payouts.
Spread Betting Tax Example
To illustrate how these three factors interact, let’s consider the following hypothetical individuals who traded forex during the most recent tax year.
- Marie enjoys her work as a freelance content producer but finds the intellectual challenge of day trading exciting. She occasionally engages a UK spread betting broker to make a bit of extra cash. Due to the high-risk, speculative nature of spread betting, however, HMRC considers her gains betting profits. Marie won’t pay either personal income tax or capital gains tax or Stamp Duty Reserve Tax – her profits are tax-free.
- Frank works full-time as a property manager but trades CFDs as a secondary income source. He’s had some success, earning about £20,000.00 this year, but his income from trading isn’t enough to allow him to quit his day job. HMRC allows Frank to deduct £1,000.00 in personal allowance from his forex trading earnings, but he will pay personal income tax on the remaining £19,000.00 at the 2020-2021 Basic Rate of 20%. Unfortunately, he can’t deduct any trading losses from his income.
- Peter makes a living as a full-time investor, supporting himself exclusively by forex trading and playing other financial markets. This year, he realised £150,000.00 in gains from forex trading. Peter can deduct £1,000.00 as personal allowance and will pay taxes on his gains under the personal income tax regime. Peter must also register as self-employed with HMRC, however, and pay capital gains tax on any CFD trading profits beyond the Capital Gains Tax Allowance.
- Susan owns a successful boutique but also day trades in forex as a source of income. In 2021, her clothing business earned £300,000.00. However, she lost money in the market. Fortunately, because Susan trades forex intending to generate profits, her losses are deductible. She can decrease her liability by offsetting her trading losses against income generated by her clothing business.
If you have doubts about which tax scheme applies to you, we suggest contacting a licensed tax advisor or accountant with any questions to avoid hefty penalties from HMRC.
Spread Betting Strategies And Tax
We have detailed a number of spread betting strategies but none of them impact tax. The only exception is when profits are made over two financial years where profits/losses will be declared over a different tax period. Generally though, this is rare as spread betting is seen as short-term trading where traders rarely hold long positions due to overnight holding charges.
Tax On Tradable Instruments
There are a number of markets you can trade with spread betting.
1. Currency Pairs
The most popular spread betting market is forex which is the most traded worldwide as highlighted on our forex statistics page. As most UK traders choose the British Pound (GBP) as their base currency the most traded currency pairs include the GBP/USD, GBP/EUR and GBP/AUD.
If you plan primarily to trade currency when spread betting we recommend you view our best Spread betting MT4 brokers page where we compare the best MetaTrader 4 brokers in the UK.
The next most popular market to trade is Indices such as the FTSE or NASDAQ. It should be noted that often the brokers won’t let you exactly trade these indices but modified versions such as the US Wall Street 30 Index or the UK 100 Index. These are relatively similar but may have some shares excluded in the mix of the index. If you are interested in this type of trading then view our FTSE 100 index.
A higher risk element to trade compared to the indices is the shares themselves. While spread betting limits what can be traded to the most popular shares only, most brokers still have a good range on popular stock exchanges. We have compared the best stock spread betting brokers if this is your core focus area for trading.
Many traders like to bet on the price of underlying commodities moving like Gold, Silver or Oil. What is often overlooked are soft commodities such as Coffee or even wheat that are impacted by the weather, wars or other geopolitical factors. Often more novice traders choose to start with commodities due to these modest and often more predictable movements. If you are new to trading with leverage then visit our best spread betting for beginners section where we compare spread betting platforms more suited for novice traders.
The final area is EFTs which allow traders to trade in some more exotic locations. There is a wide range of EFTs with some volatile so be aware of how leverage can impact profit and losses when trading this instrument. You may also want to trade first with a spread betting demo account first just to get a feel for the movement on the EFT market.
Note About Cryptocurrencies
Trading crypto is NOT available with spread betting or CFD trading. It’s worth giving special mention to cryptocurrency trading with leverage as it’s banned by the FCA. Any spread betting app won’t offer this in any form.
Best Spread Betting Platform Tax Recording
All FCA-regulated spreads betting brokers keep a record of annualised profits and losses. This can be detailed or summarised and while capital gains may be tax free for spread betting, it’s still recommended to keep records of past trading.
We created this list of the best spread betting platforms in UK list which primarily factors in the fees and trading experience of each broker. The main fee is the spread and our research found these fees can vary by over 200%. Execution speed was another core factor that we tested. If the broker tested poorly, it may mean that slippage may be experienced which is a key complaint traders have about broker performance. The best broker when it came to these two factors was Pepperstone and we have detailed their performance in our Pepperstone spread betting review.
How Do I Calculate My Forex Trading Tax?
How you calculate your forex tax depends on the kinds of instruments you use to trade forex. You won’t pay tax on spread betting, but you’ll need to tally up capital gains and Stamp Duty Reserve taxes for any profits from trading CFDs.
We suggest consulting with a personal accountant specialising in investment and day trading. Penalties for non-payment of capital gains taxes can be costly and include additional fines for late payments.
Is Spread Betting Tax-Free?
Yes. If you pay tax in the United Kingdom or Ireland, you won’t owe HMRC on your capital gains. Because spread betting is so high risk, the tax authority considers it a kind of gambling activity. In other words, HMRC considers spread betters professional gamblers.
While the absence of tax liability is one of the main advantages of spread betting, it should be noted that the highly volatile nature of the forex markets, as well as the ability to trade on margin, can lead to large losses. Before opening a spread betting account with a licensed broker, do your research. A quality retail investor account will include risk management features like stop loss and take profit orders, as well as negative balance protection. Learn more in our how to spread betting guide.
Do I Pay Tax on Forex Trading in the UK?
Yes, UK residents need to pay tax on profits made while forex trading.
Much of the confusion around tax payments and forex trading in the UK arises from traders conducting business in similar but distinct ways, making it challenging to understand which rules apply to your specific situation. Some people trading in forex as a hobby may pay nothing, whilst others who trade as a primary business using the same instruments will have a more significant tax liability.
You can learn more about tax and other elements on our spread betting vs CFD trading page.
The Bottom Line
With over 10 million traders worldwide, the forex market represents an exciting opportunity for retail investors. In addition, traders paying taxes in the UK can minimise the risk of an investigation or tax penalty by HMRC by working with one of the best forex brokers in UK.
Whether you prepare your own tax return or require the assistance of a trained professional, traders should keep in mind the following criteria when accounting for forex trading gains and calculating tax obligations:
- Am I a speculative trader or a professional investor?
- What instruments do I use to trade in forex?
- What’s my tax status?
The above article is for information purposes only and should not be considered as tax or investment advice. Consult with a qualified tax preparation professional.