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One of the main benefactors of a successful trading career is the favourable tax regulations shaped around the financial markets. Before opening a trading account though, traders need to be aware that rules, regulations and tax scenarios vary across borders and jurisdictions. Similarly, traders and retail investors need to know how tax implications differ across CFDs, Forex and other trading categories.

Being self-employed can require a lot of legwork when it comes to filing your accounts and appeasing the taxman, so knowing the ins and outs of trading tax implications will ensure you are not caught out at the last hurdle. Given the specific nature of trading, it often sits between blurred lines when it comes to defining how trading wins should be taxed.

CFD, or contract-for-difference, trading focuses on covering a diverse set of markets, such as indices, energy and metals, whereas Forex is simply foreign exchange: revolving around just currency pairs, EUR/USD for example. CFDs offer different contract sizes that vary in increment value, Forex involves trading one currency against one another, benefitting from specific weaknesses or strengths. This article will be looking strictly at the tax implications associated with CFDs.

UK

Tax regulations are completely different from country to country. In the UK, CFDs are not taxed themselves, but successful traders will have to pay CGT (Capital Gains Tax) on any profit over £12,300. The structure also allows CFD trading losses to be carried over into subsequent tax years, meaning you can offset against future profits and potentially limit your Capital Gains Tax bill.

Fortunately for UK CFD traders, they escape the Stamp Duty Reserve Tax (SDRT) that is attached to the paperless purchase of shares. This is because CFDs fall under the category of derivatives, rather than actual physical securities: meaning the trader never physically purchases the underlying asset, they simply speculate about price action. This is why UK traders typically trade CFDs rather than physical shares.

Another way traders in the UK can sidestep unnecessary tax implications is through a spread betting account. Technically classed as gambling, spread betting describes the practice of predicting and ‘betting’ on price action or the ‘spread’, rather than purchasing the security or derivative. Due to its gambling classification, UK traders can pay no tax on any profit gained through spread betting.

US

The US tax implications couldn’t be more different, but US traders will probably be more than aware. First of all, trading CFDs in the US is completely illegal. This means that if you do trade CFDs like stock indices from the US, you’re using an overseas trading platform usually via an unregulated brokerage. CFDs are classed as an over-the-counter

investment product. Traders that do wish to invest with an offshore broker should be well aware of exposure to scams and a lack of financial protection. What does this mean when it comes to tax? It’s a bit difficult. In any regard, capital gains should be documented, but it’s still a bit of a grey area.

US Alternatives?

So, if CFDs are out of the question, what instruments are US traders left allowed access to? And how does it work when it comes to tax? Traders in the US can still access forex markets, trade futures contracts, and invest in shares and ETFs, all falling under various forms of regulation by the financial authorities. Forex options and futures contracts fall

within Internal Revenue Code Section 1256 – trades are subject to a 60/40 tax bracket where 60% of gains and losses are eligible for long-term capital gains taxes, and the remaining 40% is counted as short-term.

A Complex Picture

The UK industry looks favourably upon the CFD market, but it isn’t the same story across the pond in the US. In the UK, CFDs act as an appealing way of circumventing the Stamp Duty Reserve Tax normally associated with the purchase of shares. Trading of financial instruments in the UK and US will involve some level of CGT, depending on the levels of profit and the category of instrument traded. US traders will want to stick with regulated brokers, instead of risking capital with offshore platforms in the search for CFDs.