Every trader needs to keep tabs on any tax implications that may arise from their gains and losses on the markets. It is imperative that you consult an accountant or tax advisor about your individual situation to ensure that you are fully compliant with tax laws and reporting requirements in your country. However, if you are looking for some general guidelines as to how CFD trading profits and losses are generally viewed for tax purposes, then there are a few things that you may find helpful to know.
If you are a UK resident, then any profits that you make from CFD trading are capital gains and will be subject to UK Capital Gains Tax at the current rate, after the consideration of tax-free allowances. CFDs do have a slight tax advantage over trading on the stock market, as CFD traders never own the underlying assets that they are trading. This means that profits from CFD trading are exempt for UK stamp duty, even if the underlying asset traded is a UK security. With a normal share transaction, stamp duty is usually payable at around 0.5% of the total transaction value, but this does not apply to CFD transactions.
Trading CFDs will be most tax-efficient when you face the possibility of stamp duty liability. For most traders, there are no significant advantages to CFDs over other types of trading but no big disadvantages either. Most investment income is subject to Capital Gains Tax, and CFDs are no different. The current CGT allowance will be tax-free on all gains, whether from CFD trading or any other investment that has yielded a return that falls under capital gains.
One other useful thing to remember is that CFDs are less tax efficient than their close relative – spread betting. Many UK brokers offer opportunities for both CFD trading and spread betting, and many traders are active in both. Spread betting is actually a type of gambling, and most types of gambling do not incur Capital Gains or income tax under UK law. Spread betting is different from most types of gambling, and the Financial Conduct Authority regulates it but spread betting winnings are still not currently subject to UK tax.
So, when can CFD trading be beneficial in terms of tax liability for UK residents? Most traders will not want to contemplate this, but one scenario where CFD trading could be advantageous to your overall tax situation is when you make a loss. Again, this will depend on your individual circumstances, and you will need to consult your tax advisor, but it is possible that you may be able to offset losses against any Capital Gains Tax that you owe on other investments in any given tax year. You may even be able to carry losses forward to offset against any gains in the next tax year. To keep tax reporting as straightforward as possible, you might want to request a PnL statement from your broker at the end of the tax year, as this will clearly show your overall profit or loss.
CFD trading, which is, of course, illegal in many countries outside the UK, is both legal and extremely popular in Australia. If you are an Australian CFD trader, however, then you may find that your tax situation is even more complicated than in the UK. Again, it is vital to consult a qualified tax advisor to assess how to pay tax on your profits from CFD trading, but there are a few things to be aware of.
In Australia, your gains on CFD trading are regular income (revenue) not Capital Gains (capital) for tax purposes. The Australian Tax Office has set out some fairly detailed guidelines about this. The tax issue that Australian residents must face, then, is whether they are able to offset losses when they trade CFDs, and the answer is complicated, as it will depend on whether you are trading CFDs as a business endeavour or as a hobby. Understandably, the lines sometimes blur.
If you are trading CFDs as a business, then trading profits are regular income after the deduction of trading losses and other business expenses. In order for the Australian Tax Office to see you as a business, you may need to provide records that show that you are trading regularly, that trading is your main source of income and that you keep careful records of trading activity as well as other related business activity. The tax office may even be interested to know if you have a business plan and if you have a home office. Basically, anything that proves that you operate a trading business rather than trading purely as a hobby will help the tax authorities assess your tax liability.
The ATO guidelines state that a loss from CFD trading will be an allowable deduction:
“where the transaction was entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.”
They also state that:
“a gain or loss from a financial contract for differences entered into for the purpose of recreation by gambling will not be assessable income…”
Australian traders can contact the Australian Tax Office to request a private ruling. A private ruling sets out how a tax law applies to individuals in relation to their specific circumstances. They are free, and the ATO aims to respond within 28 days of receiving a request. It is even possible to submit an early engagement request, which enables you to discuss your situation prior to applying for a private ruling.
As we have stressed, it is vital to consult a local tax professional to ensure that you are both reporting CFD income correctly according to current laws and managing any tax advantages that might result from CFD trading losses.