Forex Trading and Taxes in the UK
At times, taxes can be the deciding factor for whether or not an investment will be made. If you are a Forex trader operating from the UK, this article is a must-read for you. However, before we begin to discuss your taxes on Forex trading, these are the things that you need to consider:
- Your taxes will depend on the kind of trader that you are. For example, you can be an investor or a gambler/speculator.
- The next deciding factor can be the type of instrument that you are planning to trade. For example, it could be CFDs or spread betting.
- The last factor will take into consideration your finances. This is a subjective point as every individual has a different financial circumstance. Your salary bracket, the frequency of trading, the trade quantity, and more will be evaluated.
Once you have clarity regarding the above-stated points, we can move forward.
Forex Income Tax UK
There are three tax categories for forex traders:
- If you are a part-time spread betting trader, you are tax-free.
- If you are a forex trader that total income and annual capital gains are less than £50,000, you are subject to 10% capital gains tax (CGT).
- If you are a forex trader that total income and annual capital gains are more than £50,000, you are subject to 20% capital gains tax (CGT).
Is Forex Trading Tax-Free in the UK?
Forex trading is not tax-free in the UK. You are tax-free only if you are a part-time spread betting trader. However, if you are a forex trader, you are subject to capital gains tax.
Forex CFD tax in the UK
CFD forex traders are subject to 10% capital gains tax (CGT) if their annual capital gains are less than £50,000. However, if annual capital gains are greater than £50,000, CFD forex traders are subject to 20% capital gains tax (CGT).
Usually, forex traders use CFD brokers. So, for example, if you are a typical forex trader that has opened an account at a CFD broker and traded using the Metatrader platform, you are subject to capital gains tax (CGT).
Spread betting, in general, is not taxable, but the profits that the CFDs fetch you are taxable. However, things are not as black and white as they appear. Let’s explore this grey area further.
You will find three types of taxes in the UK. These are income tax, corporation tax, and capital gains. These three taxes, along with the kind of Forex trader you are, can decide how much tax you are liable to pay if you are trading Forex.
The first thing that needs to be done is the assessment of the trader’s status. Then, we will consider the instrument that they are planning to trade and with what intentions.
You must keep in mind that this article will give you a general outlook; assessing individual financial status can be tricky, and if you are unsure, you must take the help of a paid professional. You can hire a consultant or a professional accountant.
Status of a Forex Trader
Forex trading and exchanging Forex are two different things; in the latter, you might be doing it for short-term reasons like buying a product or service for individual or immediate consumption or traveling. However, if you belong to the former category, you will be doing it to profit. This is what makes you a trader.
There are two types of Forex traders. These are:
1. Short time trader – Speculator
This type of trader wants to make a profit but has no actual plans. They would spontaneously and occasionally put a trade. They do not have any consistency or a proper method behind their actions.
Gamblers or speculators mostly have a primary source of income that is not related to Forex trading. However, it could be a full-time job, and since any gains from trading are secondary or additional, they are not liable to pay any taxes they made via this side hustle. Hence, they will be doing tax-free trading in the UK.
2. The Investor
This is a serious trader, and mostly, trading is their primary source of income. An investor treats trading like a business. Since their primary income comes from trading Forex or activities related to Forex, they can pay taxes on it. It could be capital tax, corporation tax, or income tax. This will depend on individual profiles.
This clears up any confusion regarding the first point. Once you know whether you are a gambler/speculator or an investor, you will see if you must pay the taxes. Although, this point alone cannot decide your tax liability. You need to consider the following two points as well.
What Kind of Trading Instrument do You Prefer?
Trading UK tax does depend a lot on the instrument that you are trading. Several instruments are available for trading, but there are two main options – CFDs and Spread Betting from a retail trader’s viewer point.
Let’s see how the UK tax system behaves with various trading instruments:
1. Spread Betting
It is simpler than CFDs. Of course, everyone can take advantage of spread betting, but it is a great starting point for beginners.
For spread betting, you need to understand the concept of pips. Here, you bet on the price direction at a certain per-point amount. For example, according to you, GBP/USD can see a rise of £1 per/pip. So, you will bet in that direction.
Since this type of trading is similar to gambling or speculating, it is not considered capital gains tax.
A CFD or a contract of difference is complicated but one of the most preferred trading Forex ways. Here, trades are sized according to ‘lots.’ Lot value can differ. For example, for a primary currency, lot value is typically equivalent to $10/pip.
As a retail trader, you can easily find brokers who offer mini-lots. This will reduce the capital requirement from your end.
Trading in CFDs can incur additional costs like conversion charges. Since the base currency will depend on the underlying instrument you are trading, it will differ from your home currency. Therefore, your broker will charge you some amount for converting your profits and losses to your home currency.
For example, let’s assume that your house’s base currency is GBP, but you profit from the Japanese Yen. At the end of the trading day, your broker will convert your gains and losses to GBP, but you will have to pay conversion charges to them.
Spread betting is a short-term undertaking; it is tax-free. However, CFDs traders are liable for forex trading capital gains tax in the UK.
Individual Financial Status
Whether you are taxed or not and how much you will be taxed depends on your financial status. So if you are wondering ‘is forex trading tax-free in the UK, you need to analyze your financial position.
Your financial status is the last main factor influencing your taxes on Forex trading, but this is also the most complex one. You need help from a professional to get the analysis done, which can cost you some money.
HM Revenue and Customs, while assessing your circumstances, consider the following:
- Are you paying taxes on the income, excluding the income derived from trading?
- If you fall in the category of tax-payers, which tax are you paying and how much?
- What is your salary bracket? Is it higher or lower than GBP 50,000 per year?
- Are you a limited company, self-employed, or part of a corporation?
- Have you employed people and paying them salaries?
- Assets or products involved while investing.
- What is the quantity or frequency of your trades?
- For how long will you be holding the trading position?
There are a lot of factors that are considered while assessing your financial status. You might believe that you are in the know of your situation, but it is always advisable to take professional help, at least in the beginning, because HMRC may not see your status the way you do. It is also important to note that one has to be honest about this point; else, you can get a bill from the HMRC.
Frequently Asked Questions
Is Forex Trading Tax-Free in the UK?
Forex trading is tax-free as long as you are doing spread betting or a speculator/gambler. Your financial status also affects this answer.
How can you pay taxes on income made with Forex Trading?
If you fall in the taxpayers’ category, it will be counted as Capital Gains Tax or the CGT. Therefore, you are liable to pay it at the end of a tax year.
Are taxes paid on trades?
No taxes are to be paid on individual trades. However, if our overall trades exceed the tax-free limit in a financial year, you must pay them.
How much taxes do traders owe?
First, taxes are paid on profits. These taxes can range anywhere from 20-45%. Second, capital gain taxes can vary from 10-20%.
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.
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.
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.
This article has made it abundantly clear that your taxes will depend on three factors. It is given that other factors can also affect your tax liabilities. If we look at the bigger picture, it is evident that the UK has some of the friendliest tax implications. If you plan to trade Forex, the UK offers a better atmosphere than the USA and the EU.
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!