Forex trading is a very attractive industry that has boomed since the explosion of trading on social media, along with the increase in desire to have a side hustle alongside the typical 9-5. Forex trading is very tricky and taxing it is no different! Whether you are required to pay tax on profits from forex trading in the United Kingdom depends on how you performed the trades. Even in scenarios where you would normally be liable for tax, there are circumstances under which you won’t need to pay any.
In this article we’re going to explore in which situations forex traders in the United Kingdom pay tax, how you can trade forex without paying tax, and what type of tax you will need to pay when you are liable for taxation.
Forex trading in the UK is not tax free for most traders and will be taxed at the standard Capital Gains Tax (CGT) amount of 20%. If you are trading through a spread betting account, rather than a standard CFD account, you’ll be able to earn profits tax free due to your income being classed as gambling, rather than investing.
Do Forex Traders In The UK Pay Tax?
When trying to determine is forex trading taxable in the UK, the answer is that it depends on multiple factors. In many cases, you can trade forex in the United Kingdom without having to pay any taxes. In other cases, you can be paying 20% capital gains tax on your profits from trading.
Whether or not you pay taxes at all for forex trading in the United Kingdom is dependent on what type of trading you do. Capital gains tax will apply if HMRC considers you as having made money from appreciating capital. If you do functional forex trading but are never in possession of the capital, HMRC considers this gambling, meaning you don’t need to pay any taxes on it.
Tax law becomes further complicated when looking at what type of tax and how much of it forex traders need to pay. If you’re trading using an instrument that means your earnings are taxed, you are usually liable for capital gains tax. Even in this situation, however, you won’t need to pay any tax is you fall within the capital gains tax allowance for the tax year.
How To Trade Forex Tax Free In The UK?
The most straightforward way to trade forex in the UK without having to pay tax on it is through spread betting. Because with spread betting, you never actually own the assets you’re trading, it is classified as gambling under UK laws, giving an unusual answer to is forex trading taxable in the UK.
Taxes On Gambling In The UK
The United Kingdom does not levy taxes on winnings from anything deemed by HMRC as gambling. This remains true regardless of how much money you make per tax year, so you don’t have to worry about tax bands or the exemption ending when you reach a certain level of success. The downside to this is that you cannot claim for losses from gambling, including spread betting.
Spread betting is one of the two most common products offered to forex traders in the United Kingdom by retail forex providers. The reason this is classified as gambling in the United Kingdom is because you never take ownership of any of the assets involved, regardless of whether they’re foreign currencies or shares. Instead, you are placing a bet on which direction you believe the price will move.
If you are already familiar with trading forex, spread betting is easy to get into because a lot of the functionality is the same as traditional forex trading. You can still go long or go short, and a lot of retailers will continue to use terms like ‘buy’ and ‘sell’ for actions in their user interfaces. For most traders making the switch, the difference will be largely imperceptible.
Forex traders using spread betting will have another advantage that saves a lot of money in the long run. Because you’re only betting against the retailer, you can do all of your trading in pound sterling regardless of which currencies you’re betting on. This saves you from having to pay currency exchange fees and, depending on the retailer, potentially other commissions. There are a number of great spread betting brokers in the UK to use if you’re looking to move away from the taxation that comes with CFD trading.
Capital Gains Tax Or Income Tax – What Do Forex Traders Pay?
When assessing is forex trading taxable in the UK, we see that most forex traders who make their money from CFD (contract for differences) trading will pay tax in the form capital gains tax at the end of each tax year. Unlike spread betting, this is the more traditional option both in terms of the mechanisms of the trading and how taxes are paid.
Contract For Differences
When CFD trading, you are legally considered to be in possession of the capital through the execution of these trades. For this reason, tax laws in the United Kingdom do not consider it gambling in the same way that they do for spread betting. When this capital appreciates in value, you are obliged to pay capital gains tax on this difference.
CFD is the more traditional form of forex trading of the two most common ones in the United Kingdom. A downside to this is that you can only trade currency pairs in those currencies, which often involves exchange fees. A major benefit to this tax situation is that you can offset your losses as tax deductions, so the taxes don’t work strictly against you.
How Much Capital Gains Tax Do You Pay On Forex?
You pay either 10% or 20% in capital gains tax in the United Kingdom on profits from trading forex. Which percentage this is depends on whether you’re within or above the basic tax rate, which is £50,270 in the tax year ending in 2022. There is also an allowance for capital gains, which remains £12,300, the same as the tax year before.
To work out how much capital gains tax you have to pay on your forex earnings, you first deduct the capital gains allowance from your earnings. You will then add what is left over to your total taxable income, including income from outside of forex, and determine if this sum is within or above the basic tax rate, paying 10% or 20% capital gains tax based on that.
Conclusion – How Much Tax Do Forex Traders Pay In The UK?
In short, the amount of tax that forex traders need to pay in the UK really depends on how you’re actually trading and whether you’re involved in spread betting or CFD trading. When it comes to the latter, traders will generally pay capital gains tax when they cash out their earnings at the end of each year.
However, if you’re using spread betting and making your income from this method of trading, then you don’t usually need to pay any form of tax on your earnings. This is because you only have to pay tax on the value of your capital gains, so if you’re simply transferring money from one currency to another as part of a trade, then this doesn’t count as a taxable event.
If you have any experience on the topic, or any questions, please do leave a comment down below.