Tax on Forex profits in the UK?
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I've read too many discussion forums on this subject and following which I have called HMRC on this issue and they said any form of forex trading, regardless of whether you have a full time 9-5 job, is regarded as trading depending on the frequency and knowledge of the subject. They said it cannot be regarded as gambling as per spread forex trades are and is therefore liable to tax and that too, income tax not capital gains tax because it is regarded as "trading". Can someone in the UK who trades forex and has experiencing of dealing with HMRC please confirm their situation.
I have outlined my scenarios as follows:
Background to query
• I may casually on Sunday evenings, weekday evenings or occasionally during weekday lunch hours place some speculative forex positions with a currency broker to try and profit from a rise or fall in a particular currency e.g. GBP v Australian Dollar or US dollar. Most brokers will provide leverage to finance the position e.g. a £1m position will require me to put a deposit of 1% i.e. £10,000 as collateral. In addition to a profit or loss that materialises from the trade when it is closed, interest is either than earned or paid by me, depending on whether I buy the currency (going long) or sell the currency (going short). For the purpose of this example, let’s assume that the interest rate either way is £20 per day
• In terms of time spent dedicated to this “speculative currency undertaking”, it is difficult to quantify because I might place an automated limit order to buy or sell something which takes 2 minutes to do and then not look at again until I receive an email notification that the trade has executed and then place a limit order to close the trade with the target profit. Often, I may leave my iphone connected to the page that displays live information whether a transaction has been executed or not. As I have a day job, my time is devoted to that and not to currency trading. In the evenings, I may watch the prices whilst eating dinner / watching tv / playing with kids (but I am not glued to a trading screen)
• The volume of trading could be anything from £250,000 per leveraged trade to £1m per leveraged trade and positions could be opened and closed from 2 times per month to 20 times per month (I don’t think the size of the trade should matter here because the broker is funding the majority of the position, and the frequency is no different to somebody buying and selling many times on the stock market in the month be it on margin trading or outright purchase)
Could you please advise how HMRC will view the following situations in relation to tax in respect of the above:
• As an employee with a full time job and my primary job/income not related to the activity of forex at all, I regard this speculation as a means of personal gain or loss. I am not a professional forex trader. I am simply a person who reads the papers, financial news and makes an informed decision and may make or lose money on the trade. I would undertake the forex trade as an outright cash (spot) transaction with the broker who would finance it i.e. not a “spread trade”. This example is no different to someone who likes to undertake equity share trading as a frequent hobby. How is any tax treatment on profit/loss made here and is it regarded as income or capital gains? Is this regarded as gambling and therefore no taxes are paid on profits and no relief can be granted against losses?
• As per situation 1, except this time the transaction is undertaken as a “spread trade” which is therefore regarded as gambling and therefore not subject to either income tax or CGT (again this is not my primary job), rather than as an outright cash (spot) purchase/sale by the broker. How is any tax and relief treatment on profit/loss made here and is it regarded as income or capital gains?
• If I opened a forex account in the name of my wife and I undertake all forex trading on her behalf (under her name), and her full time job is as a dentist , how is any tax treatment on profit/loss made here and is it regarded as income or capital gains?
• Because technically I have a religious issue with gambling, yet current laws permit favourable tax treatment towards spread betting and gambling i.e. it is not taxable “if it is not regarding as trading and your main job”, my preference would be to undertake such position NOT via a spread trade. However, at risk of facing tax liabilities if I went the “non-spread betting route”, I don’t favour that idea either. Is there any way in which speculative forex trading (cash) can be undertaken which offers similar advantages as spread-betting but not necessarily via that route?
- BDLv 68 years agoBest answer
HMRC have given you the advice you seek. That advice is spot on.
There are no special rules for forex trading (unless it is done by a company). The only question that needs asked is "are you trading": are you engaged in a trading activity? That is not a simple question to answer. In its simplest, a tourist could return from holiday and convert his dollars into pounds at a better rate. That tourist has made a gain, but that is not a trading activity. On the other hand there is a person who regularly buys and sells large quantities of foreign currency with the sole purpose of realising a gain. That person is trading. There is a raft of scenarios in between. Each will fall on its own facts.
From what you say, you are without doubt trading. You are doing this on a grand scale. You are organised, and you have a profit seeking motive. It does not matter how many jobs or trades you have. If what you do on the foreign exchange is a trade, then the profits will be taxable (and your losses will be relievable).
Tax is charged on the profits of a trade. The person liable to pay the tax is the person who is entitled to the profits. It doesn't matter whose name the account is in. It will still be you who his entitled to the profits, and liable to the tax.
A person who makes model boats and sells them at a Sunday market may be fulfilling a hobby, but is also trading. Again. although doing it for enjoyment, he is also doing it to make money. Similarly a professional golfer cannot claim that his earnings are not from a trade because golf is also his hobby.
There is no law that prevents gambling from being a trade. The law defines a trade as "every trade, manufacture, adventure or concern in the nature of trade." The courts decided that gambling did not fit that description. That makes perfect sense because if it were a trade every gambler would be able to set his losses against tax. There are more losses than winnings in the gambling world.
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Petrusclavas: No wonder HMRC gets bad press, if you are to be regarded as a typical Officer. The training standards must have slipped since I did mine all those years ago. You just embarrass yourself with some of your attempts. Where in a set of accounts will you see bank and cash? Definitely not in the trading account. You will see them in the balance sheet under assets. This is because a bank account and cash are capital asset. What does that tell you about any gain that may arise on those assets? A "capital" gain, perhaps? In answer to the questioner, it is unlikely that you are trading. You are buying an asset that you hope will realise a gain, the same as you would buy stocks and shares (which also are capital assets). Any profits (gains) you make in a year may give rise to capital gains tax.
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- 3 years ago
Yes correct if spread betting its tax free in the UK and IE but you need to have a dedicated spread betting account. All other types of trading accounts will be subject to taxes and HMRC will want to know.
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