Is Trading FX Tax-free?
When it comes to trading and finally getting to enjoy the fruits of your labour, one of the biggest areas of curiosity and least educated topic areas is taxes. With the foreign exchange market being highly attractive and short of professionals providing the right education and advice, it becomes easy for newcomers to not recognise the legal implications attached to retail trading.
When it comes to the tax side of things, a major factor that will determine how you are dealt with is the avenue by which trade; Spread-Betting or CFDs.
In brief, a CFD (Contract For Difference) is a contract between the investor and business. On the close of the contract, the investor will receive the difference the opening and closing price of the purchased asset if positive. The opposite is applicable if the difference is negative. It may also be worth bearing in mind you can lose more than your initial deposit.
Spread-betting, on the other hand, allows the investor to speculate on different markets based on their stake and how much the price moves.
When it comes to CFDs, Capital Gains Tax is applicable. However, the same is not true for Spread-betting. A fundamental reason for that is because Spread-betting is classified as gambling and gambling within the UK is not taxable. While this is fortunate, this policy only favours those who are privileged enough to experience consistent profitability within the markets. The harsh reality is that many are not fortunate enough to experience what it feels like to withdraw money from the markets to even worry about tax. However, when it comes to abiding by tax regulations as HMRC will come down on you like a tonne of bricks to ensure you cough up every penny you owe.
A common deciding factor that many consider when choosing between the two is the opportunity cost of being able to utilise the leverage provided by CFD accounts versus being able to trade tax-free via Spread-betting. The possibility of being able to make exponential gains to some covers the loss of paying tax on profits. This is one of the different examples for and against the two umbrellas. Whatever your decision, make sure you do extensive due diligence from the necessary governing/regulatory bodies in your relevant jurisdiction. These policies vary in different countries, so please do not take this as financial advice.
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