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Trading Taxes in the UK

UK trading taxes are a minefield. Whether you are day trading CFDs, bitcoin, stocks, futures, or forex, there is a distinct lack of clarity, as to how taxes on losses and profits should be applied.

However, with day trading promising an enticing lifestyle and significant profit potential, you shouldn’t let the UK’s obscure tax rules deter you. This page will break down how trading taxes are exercised, with reference to a landmark case. Finally it will conclude by offering useful tips for meeting your tax obligations.

Tax Classifications

Part of the confusion around HMRC day trading taxes comes because everyone’s activities are different. Some who trade forex will be given a tax exemption by HMRC, whereas others will face expensive obligations.

UK tax implications are equally as concerned with how you approach your trading activities as to what it is you’re trading. The instrument is just one factor in your tax status. However, case law and regulations have settled on breaking trading activity into three distinct categories, for the purpose of taxation.

1. Speculative

The first category is speculative in nature and similar to gambling activities. If you fall under this bracket any day trading profits are free from income tax, business tax, and capital gains tax. As you can probably imagine, falling into this category isn’t a walk in the park (more on that later).

2. Self-Employed

The second category taxes trading activity in precisely the same way a normal self-employed individual undergoing business activity is taxed. You will be liable to pay business tax, or the obligations of those who fall under the third tax bracket.

3. Private Investor

If you are classed as a private investor your gains and losses fall under the capital gains tax regime. The benefits and drawbacks of which are detailed further below.

It’s worth bearing in mind that because trading activity fluctuates, you could well fall within any and all of these three categories over a given period.

Day Trader vs Investor Status

Whether you’re classed as a day trader or an investor could make a serious difference to your tax obligations.

The Difference

The crucial distinction is that a ‘trader’ will hold shares as his stock like a hardware store holds power tools. Whereas, an investor, will hold shares for use as assets to then generate income, dividend income, for example.

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This is important because a share trader will pay income tax, whilst an investor will pay capital gains tax.

Which Classification Is Advantageous?

Prior to 2008, there were no substantial differences between each status.

If you were classed as a trader you were able to offset more expenses. Share investors, however, allowed for tapered relief and your annual exemption to be offset. Consider that many currency, options, and stock speculators only hold onto assets for a short period of time, this means for both investors and traders the tax rate could be 40% (assuming they were both higher rate taxpayers).

Having said that, there were genuine investors who held onto shares and assets for a long period of time. This qualified them for a more beneficial capital gains tax rate of 24%, or just 10% if they invested in AIM shares.

However, April 2008 brought with it change. Gone was tapered relief and in its place, a fixed 18% capital gains tax rate was introduced. This gives the majority of investors a substantial tax advantage over traders. The additional tax relief on expenses probably would not make up for the significant reduction in the tax rate for investors.

Fortunately, it’s not all bad news. As a trader, you have more flexibility in regard to the treatment of losses. Instead of being carried forward to be offset against further capital gains, you can offset the loss against any other income for the tax year of the loss. So, if day trading isn’t your only course of income, you could potentially offset losses against employment income and interest income, for example.

It’s worth noting that if you claim a trader status to benefit from loss relief, HMRC often take a closer look. Due to this supposed advantage of investor status, day trading tax rules in the UK may toughen up in coming years.

Classification Process

HMRC consider the ‘badges of trade’ in order to determine whether you’re activity will be classed as trading or investment in nature.

Whilst tax rules and regulations remain somewhat grey, judicial decisions and best practice have clarified certain criteria and factors.

Motivation

Despite being one of the hardest areas to make an accurate determination on, this is a vital component.

If HMRC believes your motivation for trading is to generate profits, this will impact on whether they consider your activity as trading for the purposes of taxation.

Of course, they do not simply take your word for it. Instead, they look at the facts surrounding your transactions. They consider the following:

  • Was it a one-off trade? Alternatively, have there been numerous trades of the same nature, carried out in a similar manner to ordinary traders?
  • Is this your sole occupation? Alternatively, do you have other employment, suggesting you don’t trade purely to make a living?
  • What do you do with your profits? Do you re-invest them into more trading activity?

Transaction

HMRC can examine the circumstances surrounding the transaction to identify a trading motive. They will consider the following:

  • How you acquired the shares – Did you purchase or inherit them? If you sold inherited shares you would obviously be less likely to be classed as trading, and it’s more likely to be considered investment activity.
  • Timing – What was the length of time between the purchase and sale date?
  • Means – Did you use finance to buy your instrument?
  • Cause – Did a sale take place in an emergency? If so, it’s less likely to be considered as trading.
  • Frequency – Is there evidence of a pattern of trading behaviour? Are you regularly buying and selling in your chosen instrument? This is one of the most important areas of consideration.

Whilst all of the above factors are taken into account to determine your financial trading tax obligations in the UK, on the whole, instruments that generate an income are classed as investment assets.

Stock Taxes

In particular, stock trading tax in the UK is more straightforward. This is because there is a higher chance share trading by its very nature will be classed as investments.

A judge highlighted the point by stating, “Where the question is whether an individual engaged in speculative dealings in securities is carrying on a trade, the prima facie presumption would be … that he is not.”

Having said this, a frequent pattern of buying and selling shares will lead the HMRC to take a closer look and consider the argument for ‘trading’.

So, stocks do bring with them some advantages in comparison to options trading taxes, for example.

A Ali v HMRC

The case brought by Mr. Akhta Ali was a defining case in UK trading taxes. After Mr. Akhta Ali successfully appealed a decision brought by HMRC, a number of common misconceptions were put straight. The case brought much-needed clarity in considerations around day trading profits and losses, in particular.

What he won, was the right to treat his profits and losses from day trading as ‘trading’ profits and losses. This meant they would be subjected to the same sole trader tax rate as ordinary businesses in the UK.

His losses which were in the hundreds of thousands of pounds were allowed to be offset against the profits earned by his other business. This resulted in significant deductions in his overall tax liability. In fact, in a number of preceding years a tax calculator established his liability has virtually zero.

The Facts

Mr. Ali ran a successful pharmacy business. He wanted to day trade shares as a second legitimate business. Between the years 1995 and 2002, he considered himself as an ‘investor’. Then, between 2000 and 2005 his activities changed from ‘investing’ to ‘trading’. So, whilst investing his shares he reported the profits and losses in line with capital gains regulations.

In 2005 he decided he was now a day trader. He argued his activities were done with the intention to generate income. He, therefore, believed he was carrying on a trade and any profits and losses should now fall under the business tax rules instead.

The HMRC ruling was in line with what many believed at the time. This was that losses would often exceed profits for day traders and therefore they were hesitant about classing day traders as self-employed.

Final Verdict

The 2020 ruling meant HMRC will now have to sacrifice the considerable tax revenues they had previously generated from losses, as day traders can now simply offset these losses against other forms of income.

It’s easy to see why HMRC were unwilling to accept such a seamless transaction from investor to trader. The lines are difficult to draw and will likely lead to less revenue for the tax man.

The simple truth is the diversity of a day trader’s activities doesn’t fit within a one-size-fits-all approach. So, what should you take from the case? Mainly, that getting into a disagreement with HMRC can be a long-winded and expensive process. If Mr. Ali had asked permission beforehand, instead of seeking forgiveness afterwards, this whole episode could have been avoided.

The solution then – always query with HMRC and seek advice first. It could save you considerable time and significant money.

Different Instruments, Different Taxes?

As you may have already gathered from this page, CFD trading tax implications in the UK will be the same as those interested in FX, binary, bitcoin, and commodity trading taxes. HMRC is less concerned with what you’re trading, and more interested in how you’re trading it. Share trading tax implications will follow the same guidelines as currency trading taxes in the UK, for example.

I hate to be the bearer of bad news, but those hoping to start trading forex tax-free aren’t going to have much luck either. Forex trading tax laws in the UK are in line with rules around other instruments, despite you buying and selling foreign currency.

However, if you remain unsure about tax laws surrounding your specific instrument, seek professional tax advice.

Tax Tips

Even with all the information at your disposal, day trading and UK tax is still an unsteady tightrope to walk. That’s why you need to act sensibly. Fortunately, there are two main tips to follow.

1. Keep A Record

Your trading activity over the course of a year can vary between ‘speculative’, ‘self-employed’ and ‘investing’ activity. That means when it comes to filing your tax returns you need a detailed account of all your trading activity. You should keep an account of the following:

  • Instrument
  • Purchase and sale date
  • Price
  • Entry & exit points

With this information to hand, you’ll save yourself a large headache when you file your tax returns.

You can also get your hands on software which makes this process hassle-free. Taxes on day trading bitcoin can be automatically identified if software has access to your trade history, for example.

2. Seek Advice

With so much capital on the line, is it really worth risking any mistakes? If you are unsure you can always contact HMRC to seek clarification. There are also numerous tax advisors that specialise in tax for day traders. It’s easy to think you don’t want to fork out the extra cash, but you may find they can save you sizeable sums.

Key Points

UK taxes on forex, stocks, options, and currency day trading are not crystal clear. You will need to carefully consider where your activities fit into the categories above. It’s also worth bearing in mind that failure to meet your tax obligations can land you in extremely expensive hot water, and even prison. So, if you want to stay in the black, take taxes seriously.

This page is not trying to give you tax advice. It simply looks to paint a clearer picture of HMRC’s approach to trading activity. Finally, before you file your tax returns, it’s always advisable to seek professional tax advice.

Spread betting vs CFDs

Spread bets and contracts for difference (CFDs) are both leveraged products – enabling you to open a position while putting up just a percentage of the capital. Though they share many benefits, there are key advantages unique to each.

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Advantages of spread betting

  • No capital gains tax 1
  • No commission, just our spread
  • Easy to bet in the currency of your choice – greater control of currency exposure
  • Deal on rising and falling markets
  • Leveraged access to the markets
  • No stamp duty
  • 24-hour dealing
  • Use prices based on the underlying market

Advantages of CFDs

  • Direct market access (DMA) on forex 2 and shares
  • Losses can be offset against profits for tax purposes
  • Deal on rising and falling markets
  • Leveraged access to the markets
  • No stamp duty
  • 24-hour dealing
  • Use prices based on the underlying market

Spread betting vs CFDs: key differences

The key difference between spread betting and CFD trading is how they are taxed. Spread bets are free from capital gains tax, while profits from CFDs can be offset against losses for tax purposes. There’s no stamp duty to pay with either product because you don’t take ownership of the underlying assets when you trade.

Both enable you to go long or short, though there are technical differences in how they work:

  • Spread betting involves staking an amount of money per point of price movement in the underlying asset
  • CFD trading involves exchanging the difference in price from the point at which the contract is opened to when it is closed

All spread bets have a fixed expiry date, while CFDs don’t expire (with the exception of futures). Professional traders can get DMA on forex and shares with a CFD trading account. 2

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Is spread betting or CFD trading best for me?

If you’re experienced in the financial markets, both spread betting and CFD trading can bring variety and range to your portfolio. You can see a full comparison in the table below.

Spread betting could be for you if.

  • You want any profits to be tax-free 1
  • You want to control the size of your deal
  • You want to deal shares in smaller sizes and not be penalised by a minimum commission
  • You want to deal all international markets in sterling
  • You want to take a longer term view on forex and shares with forward markets

CFD trading could be for you if.

  • You’re already comfortable with the underlying market and its terminology, so want a product that feels similar
  • You want to use DMA for shares and forex 2 trading, while getting our OTC benefits
  • You want to offset losses against profits as a tax deduction
  • You want a corporate or professional trading account
  • You are hedging physical assets in your portfolio
  • You want an efficient way to hedge using the tax-deductible benefits of CFDs

Derivative product differences in detail

Spread betting CFD trading
What is it? The placing of a bet that allows for a range of outcomes. Trading a financial derivative – you deal on prices derived from the underlying market, not on the underlying market itself.
Are there expiries? Expiry dates far in the future. No expiry dates (excluding forwards).
Do I pay tax? You don’t pay capital gains tax or stamp duty. 1 You don’t pay stamp duty, but you do pay capital gains tax. However, losses can be offset as a tax deduction.
When can I trade? 24-hour dealing on forex and major stock indices. During the underlying market hours for other markets. We also offer weekend trading on selected markets. 24-hour trading on forex and major stock indices. During the underlying market hours for other markets. We also offer weekend trading on selected markets.
Do I pay to keep positions open? Overnight funding on daily funded bets. Rollovers on forwards and futures. Overnight funding on all markets, except futures. Rollovers on futures.
Does IG profit if I lose? We profit primarily from spreads and funding, and hedge the majority of net client exposure. We accept a low level of risk, from which we can make a small profit or loss. We profit primarily from commission, spreads and funding, and hedge the majority of net client exposure. We accept a low level of market risk, from which we can make a small profit or loss.
The outcome of a client’s DMA 2 trade never has an impact on our profit or loss.
What kind of trading is it suitable for? Intra-day, daily and
medium-term
Intra-day, daily and medium-term
Can I receive dividends? We make a dividend adjustment on equity and stock index spread bets. We make a dividend adjustment on equity and stock index CFDs.
Can it be used for hedging? Yes, but CFDs can be more effective because of their tax-deductible benefits. Yes
Can I open a corporate account? No Yes, we offer corporate accounts.
Range of markets More than 17,000 markets, including:
Forex
Stock indices
Shares
Cryptocurrencies
ETFs and ETCs
Metals
Energies
Spot metals
Soft commodities
Options 3
Interest rates
Bonds
Sectors
Share forwards
Forex forwards
Daily stock index futures
Stock index futures
Daily oil futures
More than 17,000 markets, including:
Forex
Stock indices
Shares
Cryptocurrencies
DMA forex 2
DMA shares
ETFs and ETCs
Metals
Energies
Spot metals
Soft commodities
Options 3
Interest rates
Bonds
Sectors
Stock index futures
The mechanics of dealing You define the size of your deal by selecting the amount you want to bet per point of movement (£/pt). Profits and losses realised in currency you bet in. You define the size of your deal by selecting the number of contracts or shares you want to trade. Each contract has a fixed value. Profits and losses realised in traded market’s base currency. GBP contracts available.
The charges A spread on all markets. No commission. Funding adjustments (excluding futures and forwards). A spread on all markets except shares. We charge a commission on share CFDs, but no spread. Funding adjustments (excluding futures).
Dealing platforms Desktop dealing
Mobile app (iPhone, Android)
Tablet app (iPad)
MetaTrader 4
ProRealTime
Desktop dealing
Mobile app (iPhone, Android)
Tablet app (iPad)
L2 Dealer (DMA) 2
MetaTrader 4
ProRealTime
Direct market access No Yes, for forex 2 and shares
Getting started Introduction programme
Interactive platform preview
Demo account
Introduction programme
Interactive platform preview
Demo account

Example trades

FTSE 100 spread bet vs CFD trade

The below example takes a short position on the FTSE 100 – using the same deal size, it compares the process and outcome of a spread bet and a CFD trade if the market falls as predicted.

Spread bet

CFD trade

Spread bet CFD
Underlying market value FTSE 100 6200
Our price 6199.5-6200.5 6199.5-6200.5
Deal Sell at 6199.5 Sell at 6199.5
Deal size £10 per point One contract. Each contract is worth £10 per point
Margin required £3100 Deal size x mid price x margin rate (5%) £3100 Deal size x mid price x margin rate (currently 5%)
What happens next? The market falls to 6150 by 10pm. This is the price our funding is calculated at. It continues to fall steadily until the next day, reaching 6120.
Funding Overnight funding charge of £3.38
(One-month Libor (eg 0.4925%) minus 2.5% x value of deal x underlying level at 10pm) / 365 (-2.0075% x £10 x 6150) / 365
Overnight funding charge of £3.38 (One-month Libor (eg 0.4925%) minus 2.5% x value of deal x underlying level at 10pm) / 365 (-2.0075% x £10 x 6150) / 365
Underlying market 6120
Close Buy at 6120.5 Buy at 6120.5
Overall market movement and profit/loss 6199.5 – 6120.5 = 79 Value of one point = £10
Gross profit = 79 x £10 = £790
6199.5 – 6120.5 = 79 Value of one point = £10
Gross profit = 79 x £10 = £790
Costs 1 pt spread: the underlying fell by 80 pts, but you benefited from a fall of 79. Funding deducted from cash balance: £3.38 1 pt spread: the underlying fell by 80 pts, but you benefited from a fall of 79. Funding deducted from cash balance: £3.38
Net profit £786.62 tax-free* £786.62 subject to tax
What if. If the underlying market rose to 6280 pts instead: 6280.5 – 6199.5 = 81 pts
81 x £10 + £3.44 (higher funding cost to account for higher market close at 10pm)
£813.44 net loss
If the underlying market rose to 6280 pts instead: 6280.5 – 6199.5 = 81 pts
81 x £10 + £3.44 (higher funding cost to account for higher market close at 10pm)
£813.44 net loss

The profit and net loss for placing this trade via spread bet or CFD is the same.

However, while spread bets are tax-free and you keep all your profit, CFDs can be subject to capital gains tax, depending on individual circumstance.

Because CFDs are subject to tax, you can offset losses you make via CFD as a tax deduction.

* Please note that tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

GBP/USD spread bet vs CFD trade

The below example demonstrates the differences between a spread bet and CFD trade on a long GBP/USD position, showing the outcome if the market rises as expected.

Spread bet

CFD trade

Spread bet DFB CFD
Market Spot GBP/USD
Price 15,579.7/15,580.5 1.55797/1.55805
Deal Buy $10 a point at 15,580.5 Buy 1 contract at 1.55805 (1 contract = £100,000)
Initial margin required Notional value is $155,805 (or £100,000) and margin factor is 3.33%, so margin = $5188.3 (or £3330)
What happens next? GBP/USD rallies overnight, and the position is held through 22:00 (London time)
Funding Funding = amount per point x funding adjustment factor= $10 x 0.27
= $2.70
Where funding adjustment includes underlying tom-next rate and IG’s charge for holding positions overnight which is no more than 0.0022% per day.
Funding = amount per point x funding adjustment factor = $10 x 0.05
= $0.50
Where funding adjustment includes underlying tom-next rate and IG’s charge for holding positions overnight which is no more than 0.0022% per day.
Price 15,695 – 15,695.8 1.5695 – 1.56958
Close You sell at 15,695 You sell at 1.5695
Gross profit $1145
15,695 – 15,580.5 = 114.5
Value per point = $10
114.5 x $10 = $1145
$1145
1.5695 – 1.55805 = 0.01145
Number of points = 0.01145 x 100000 = 114.5
114.5 x 10 = $1145
Costs 0.8 point IG spread (included)
Funding cost = $2.70
0.8 point IG spread (included)
Funding cost = $0.50
Net profit $1142.30 tax free* $1144.50 subject to tax
What if. If the market dropped 114.5 points instead:
$1145 + $2.70
Net loss = $1147.70
If the market dropped 114.5 points instead:
$1145 + $0.50
Net loss = $1145.50

Find more examples of spread betting and CFDs.

What are DFBs?

Daily funded bets (DFBs) are long-term bets on the cash price of an underlying instrument. DFBs have no expiry date, so we make a cash adjustment to your account to reflect funding charges.

Why do CFD and spread betting FX prices look different?

  • You trade forex via CFD in contracts or lots. We therefore display CFD forex prices in the same way you would expect to see them on an FX exchange: e.g. 1.31425
  • Because you spread bet on forex in currency per point, we display prices differently e.g. 13142.5. This makes it easier to see per point movements.

This makes no difference to the price you deal at or your potential profit or loss: it simply makes it easier to track per point movements.

* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

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Fast execution on a huge range of markets

Enjoy flexible access to more than 17,000 global markets, with reliable execution

Deal seamlessly, wherever you are

Trade on the move with our natively designed, award-winning trading app

Feel secure with a trusted provider

With 45 years’ experience, we’re proud to offer a truly market-leading service

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1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
2 From 2 July 2020, regulatory interventions mean that certain products are unavailable to retail traders. As a result, we can only offer Forex Direct (forex DMA) to professional traders. To find out more about this, and to check whether you are eligible for a professional account, please see our professional account page.
3 Options are only available via spread betting accounts and professional CFD accounts.

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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.

CFD, share dealing and stocks and shares ISA accounts provided by IG Markets Ltd, spread betting provided by IG Index Ltd. IG is a trading name of IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. Both IG Markets Ltd (Register number 195355) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.

The information on this site is not directed at residents of the United States, Belgium or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

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