If you’re dedicated enough to be able to make profits in the forex markets, you’re struggle isn’t over yet. You now need to figure out how to tax this profit to keep the HMRC happy.
Sadly, with forex being a relatively new industry for retail traders and so few traders actually getting to the stage where tax is looked at – there really isn’t much guidance online. With that being said, is forex trading tax free here in the UK?
Forex trading is tax free in the UK if you are using a Spread Betting account and it’s not your primary source of income. If you are trading CFD’s, as most forex traders do, you’ll be subject to Capital Gains Tax or Corporation Tax, ranging from 10-20% at the end of the tax year.
How Does Tax Work For Forex Traders In The UK?
If forex trading wasn’t complicated enough, you now have to worry about ensuring you’re complying with all tax regulations. On a positive note, the UK is very lenient when it comes to taxation on forex profits and the percentages are much kinder to traders here, than elsewhere.
It’s first important to understand that there are various different ways you can trade forex, which greatly dictates how much tax you pay. There is either Spread betting or usual CFD trading. If you’ve never setup a spread bet account, assume that you’re trading CFD’s.
If you’re trading CFD’s, you’ll find that these are taxed as either a UK Corporation or Capital Gains Tax, depending on how you have structured the trading operation. If you’re trading on a Spread betting account, you’ll most likely not be paying any tax on profits, like you would be if you were trading forex through a limited company. Let’s find out more…
Spread Betting – Is It Tax Free For Forex Traders?
Spread betting in the UK is tax free! This is simply due to the fact it is legally classed as gambling, not investing. If you’re new to spread betting, it works in the following way;
You wager on whether an asset (i.e. Forex pair or commodity) will either rise or fall at a particular time/event (known as the expiry e.g. monthly expiry for NFP). You must also factor in costs such as spreads and commissions.
By this definition alone, it is very unlikely that the HMRC will be able to tax your spread betting profits. You can not structure a spread bet account to be taxed as a company. As stated above, you’ll most likely not pay any tax at all on forex trading – unless of course you’re trading CFD’s.
The only downside to this way of trading is you will find it very hard to get lending. Getting a mortgage as a forex trader is hard enough, let alone when your income is legally classified as gambling. This is something I would highly recommend keeping in mind.
If you are interested in spread betting, have a look at some of the best rated spread betting accounts.
There has always been an argument of whether forex trading is gambling or investing. By using a spread betting account, you’re leaning more towards the gambling edge, rather than classic investing.
I would also recommend visiting the HMRC website, or visiting an experienced accountant just to ensure the profits are actually tax free as there is sometimes nuance to this, depending on your financial situation.
CMC markets has a great article on the benefits of spread betting (for tax purposes), opposed to CFD Trading.
CFD Forex Trading In The UK – How Much Tax Should You Pay?
Typically, with CFD trading, there are two main ways this will be taxed. This will be either Corporation tax or Capital Gains (CGT), depending on your situation.
UK Corporation Tax For Forex Traders
If your forex trading is not deemed to be your primary source of income, it will fall under Section 4 Taxes Act 2007. The above means that once you make over £10,600 in a tax year, you’ll be taxed at 27.75% for the next year.
Although this sounds an awful lot like tax – it’s important to remember that there can be various other taxes and deductions made and you aren’t expected to pay anything until the end of the tax year (5th april).
This handy graph and article by Trading Economics breaks down exactly how UK Corporation tax works.
Capital Gains Tax For Forex Traders
If your forex trading is your primary source of income then it’s taxed as ‘trading income’ under Section 18 Taxes Act 2007. This means that once the losses (if any) are offset, you pay CGT at 10-20% on the remainder amount. It’s important to remember that this is only possible if you make more than £11,300 per year.
Which has a great article breaking down exactly how much your CGT will be as a forex trader and how to calculate this.
As with anything – it’s important to check with the HMRC website for exact information on taxation, but it is likely you’ll pay corporation tax if your income isn’t high enough to be taxed as capital gains.
I would also highly recommend consulting an accountant that has experience with CFD’s as they will give you the reassurance and peace of mind that you are classifying your income properly.
From having a brief shop around, it maybe worth contacting Accountants For Traders for advise if you’re London based!
The Nuance To Tax For UK Forex Traders
As mentioned previously, there is some nuance to forex trading taxes in the UK and it’s certainly not always as clear cut as we wish it was. There are other factors that can also be considered, such as:
- Personal income (salary)
- Duration of trades
- Frequency of trades
- How you have structured the trading business (sole trader, limited company)
These are just some of the factors that can play an influence in the amount of tax you pay on your forex trading profits. I would highly recommend checking the HMRC website for current tax year information, but also speaking to an accountant that has experience with CFD’s and forex traders.
Don’t Worry About Tax Whilst Learning To Trade
Over the last few months, I’ve spoken with many amateur traders that seem incredibly interested in how forex traders pay tax and whether it’s capital gains, income tax or something else entirely.
It’s great to have an interest in the taxation of forex profits and at some point – this will be an incredibly important part of your trading career. With that in mind, I think it’s important to be realistic.
The overwhelming majority of forex traders lose money. In fact, according to BluFx, 90% of traders are now losing money in the markets. This is exactly the reason why I wouldn’t worry about how forex traders are paying taxes. If you aren’t making profits, you won’t need to about forex taxation just yet!
Keeping Your Broker Statements Filed – My Top Tip
I have some slightly contradictory advice here as I’ve just said not to worry about paying tax on forex profits until you’re actually profitable within the markets. With that being said, I think there is a huge amount of value in keeping your broker statements to hand.
This is an example of a blank monthly trading statement from one of my brokers, IC Markets. I would highly recommend keeping a folder of all of the monthly, quarterly and even daily statements as they make their way into your inbox.
There are 2 main reasons I would recommend doing this…
- Firstly, this makes it incredibly easy for your accountant to see what you’re doing and how much tax needs to be paid on your trading profits. If you’re paying your accountant hourly for their time, the more documents you can have outlining your trading efforts – the better!
- Secondly, this holds you accountable. Much like using a third party tool like MyFxBook, this allows you to actively track your profit, losses and trades to ensure that you’re actually sticking to your trading plan.
In Conclusion – Is Forex Trading Tax Free In The UK?
In summary, forex trading is tax free in the UK if you’re spread betting as an amateur trader. Traders that are trading CFD’s will be taxed at Capital Gains/Losses (CGT) in the end of the tax year.
It’s not as black and white as this for all situations, so I would highly recommend seeking the advise of an accountant with experience in this sector. Although you may think that this will be a waste of money, I can promise you it’ll hurt less than a surprise HMRC tax bill the following tax year!
With so much information growth in this trading space over the last few years, it’s really interesting to see that the information on whether or not forex trading is taxable in the UK has never really been updated.
Regardless, I hope you’ve enjoyed this article on whether forex trading is free from tax in the UK and learned something new about taxation for forex traders in the UK.
How do you tax your forex trading profits? Let me know in the comments down below…