Forex trading in the UK is tax-free because it is defined as spread betting. The tax system marks this spread betting industry as tax-free.
If you’re looking to get started in trading forex, you must be properly informed on the taxes you will be required to pay. In this article, I will provide you with this exact information, and whether income earned through forex is tax-free or something, you must state and pay taxes upon.
The first thing to note is that the UK’s forex trading taxation system is one of the most lenient and trader friendly taxation systems. There are 3 different aspects of how your trading activity is categorized and treated by the HMRC.
Trading activity according to the HMRC.
The HMRC will categorize you based on your trading activities into one of three categories. This category will have a great impact on your taxation amount.
Speculative trading
The first category is speculative trading. Speculative trading can be compared to betting activities. As there is quite a bit of risk, this category of people will not subject to income tax, business tax, or capital gains tax.
Self-employed trading
The next category is self-employed trading. Traders who are classified into this category will be required to pay business tax. This is because they are considered as general self-employed individuals.
Private investor: The final category is someone that will be required to pay capital gains taxes.
Taxes paid on forex trading.
The taxes you will be required to pay also depends on the instrument through which you are trading. There are 2 categories. The first is spread betting, or the second one you can fall under is known as the contact for the difference.
Spread betting account
According to UK law, if you decide to trade under a spread betting account, then the income you earn will be exempted from taxes. So what exactly is spread betting? Spread betting is where you speculate on the price movements. Spread betting is based on an underlying asset’s broker prices, and you do not actually own the asset. Spread betting does have a drawback: you cannot claim potential losses against the rest of your personal income; as a forex trader, when spread betting, the benefit for you is that you will not pay stamp duty. This is because you don’t own the underlying asset. You are trading some derivative instrument. The brokers pay the stamp duty.
CFD
If you decide to trade CFD, you will be subject to pay capital gain tax on the amount you earn from trading. In the UK, the basic rate tax bracket is where you earn less than 50,000 pounds. If your profit falls within this range, you will be required to pay 10% in taxes. If your capital gains exceed 50,000 pounds, you will be subject to paying 20% in capital gains taxes.
Filing your taxes
To actually file your taxes, you can keep track of all of your transactions, or you can acquire a profit/loss statement from your broker. Something to note is that you may be able to ask for tax relief if you undergo losses while trading.
Full-time trader vs. part-time trader
Another thing to keep in mind before embarking on your forex trading journey is whether you plan on being a full-time or part-time trader. The amount of taxes you will pay will vary if you plan to work a full-time job and trade on the side, compared to being a full-time forex trader.
Part-time trader
If you plan on trading part-time, then the amount you earn from spread betting will be considered a secondary income source. When this is the case, this income will be tax-free.
Full-time trader
If you plan on trading forex full time, it will be considered your primary income source. In this case, you will be required to pay income tax.
Final thoughts
So is forex trading tax-free in the UK? In conclusion, the amount of taxes you will be required to pay will vary greatly depending on your specific situation. If you are interested in part-time spread betting, then yes, you will be able to trade forex tax-free in the UK. However, other types of forex trading will require you to pay taxes, and this amount will vary. Hopefully, you found this article informative as well as enjoyable to read!
