Yes, Forex trading in the UK is tax-free because it is defined as spread betting.Tax system mark this spread betting industry as tax-free.
If you’re looking to get started in trading forex, it is important that you are 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 forex trading taxation system in the UK is one of the most lenient and trader friendly taxation systems. There are 3 different aspects as to how your trading activity is categorized and will be treated as 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 contact fro difference.
Spread betting account
If you decide to trade under a spread betting account then the income you earn will be exempted from taxes according to the UK law. So what exactly is spread betting? Spread betting is where you speculate on the price movements Spread betting is based on broker prices of an underlying asset and you do not actually own the asset. Spread betting does have a drawback which is that you are unable to claim potential losses against the rest of your personal income. The benefit for you as a forex trader when spread betting is that you will not pay stamp duty. This is because you don’t own the underlying asset. You are trading some type of derivative instrument. The stamp duty is paid by the brokers.
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 then you will be required to pay 10% in taxes. If your capital gains exceed the 50,000 pounds, you will be subject to paying 20% in capital gains taxes.
Filing your taxes
In order 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 prior to 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 on working a full-time job and trading 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 source of income. When this is the case this income will be tax-free.
Full-time trader
If you plan on trading forex full time then it will be considered your primary source of income. 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. Other types of forex trading, however, will require you to pay taxes and this amount will vary. Hopefully, you found this article informative as well as enjoyable to read!
