Forex trading: Taxation in the UK explained
Our ultimate guide to the UK income tax law for forex traders
- Understanding forex trading taxes
- Know your forex trading tax status according to HMRC
- Forex trading income under UK tax law: instrument types
- Full-time trader vs trading as additional income
- Cryptocurrency taxation in the UK
If you want to become a forex trader in the UK, you should know about forex tax and what your forex trading tax responsibilities are under UK income tax law. Is this a type of income tax-free or should you report your earnings and pay any relevant tax? Let’s see when this type of income is not taxed and when it is subject to taxation.
Understanding forex trading taxes
You should always seek advice from a tax accountant professional or the HMRC because tax law can be confusing and subject to change. The UK tax year runs from 6 April to the following 5 April, and the standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.
Forex trading tax in the UK is one of the most trader-friendly taxation systems. It takes into account three aspects: how forex trading activities are treated, the type of instrument traded and how HMRC will record your tax status.
Know your forex trading tax status according to HMRC
How the HMRC treats your trading activity has significant implications for your tax liability. HMRC can classify traders and their trading activities in one of the following categories:
Speculative trading – considered to be similar to betting activities. If you are classified under this category then gains earned from forex trading are not subject to income tax, business tax or capital gains tax. Nevertheless, as the income is not taxed, you are not entitled to claim potential losses.
Self-employed trading – traders in this category will be liable to pay business tax as they are treated as general self-employed individuals. Make sure that you go through the losses that can be claimed if you are taxed as self-employed.
Private investor – someone whose profits and losses are subject to Capital Gains Tax (CGT).
Forex trading income under UK tax law: instrument types
Forex tax on trading in the UK depends on the instrument through which you are trading currency pairs: you can fall under spread betting or you can trade contract for differences (CFDs).
If the trading activity is performed through a spread betting account, income is tax-exempt under UK tax law. Spread betting, from a forex trader perspective, is when a trader speculates on price movements, based on broker prices, for an underlying asset without actually owning the asset. The downside is that when your trading activities are classified as spread betting you are not eligible to claim losses against your other personal income.
However, there is a benefit for you as a forex trader: you don’t pay stamp duty because through spread betting you don’t own the underlying asset. Instead, you are trading some form of a derivative instrument. The stamp duty is levied and is paid by the spread betting providers (brokers).
If you trade CFDs, then you are subject to capital gains tax (CGT) on gains from your trading activities. CGT is 10% for basic rate taxpayers, when total income is £12,571 to £50,270 (the basic rate tax bracket).
If you are in the higher tax band (your total income is £50,271 and higher) then your profits will be subject to 20% CGT. But don’t be deterred from trading CFDs immediately, because there is a CGT tax allowance for the first £12,300 and this threshold should not be neglected.
For filing your tax return, you can make a record of your transactions or ask for a PnL (profic and loss) statement from your broker. Another important issue to keep in mind is that you can ask for tax relief if you incur losses from your trading activity.
Full-time trader vs trading as additional income
There is a difference between traders who trade part time and those who are classified as ‘trading for a living’.
If you are a part-time trader, then your earnings from spread betting activities are your secondary source of income and are tax free.
If you are a full-time trader and the profits from forex trading are your primary source of income, then you are liable to pay the income tax.
Cryptocurrency taxation in the UK
Because cryptocurrencies have become an important part of trading activities, we should also take a look into the basics of cryptocurrency taxation in the UK.
In accordance with UK tax law, individuals are liable to pay CGT when they sell cryptocurrencies for money, exchange one cryptocurrency for another, use the cryptocurrency to buy other types of assets and services, etc.
As it is the case with other types of assets taxed under CGT, taxable gains earned from cryptocurrencies represent the difference between the purchase price and the sale price. The tax rate is the one applied for CGT stated in the CFD section above. HMRC has implemented a tax framework for individuals as well as for businessses dealing with cryptocurrency and you need to know under which framework you will be taxed.
The mining of Bitcoin is also a taxable activity when you mine coins with a value above £1,000, but you can claim expenses on electricity and mining equipment such as rigs.
The tax on forex trading in the UK depends on the instrument through which you are trading currency pairs: you can fall under spread betting or you can trade contract for differences (CFDs). If the trading activity is performed through a spread betting account, the income is tax-exempt under UK tax law. If you trade CFDs, then you are subject to capital gains tax (CGT) on gains you earn from your trading activities.
Always seek advice from a tax accountant professional or the HMRC since tax law can sometimes be confusing and, in future, it could be subject to change.
The UK's forex trading taxes system is one of the most trader-friendly. If you are trading through a spread betting account then the income is tax-exempt under UK tax law. In addition, you also don’t pay stamp duty because in a spread betting account you don’t own the underlying asset.
If you trade CFDs then you are subject to capital gains tax (CGT) on gains you earn from your trading activities. The CGT rate for individuals in the UK is 10% for basic rate taxpayers when their total income and capital gains are no more than £50,270. If your total income is £50,271 or higher then your profits will be subject to 20% CGT. There is, however, a CGT tax allowance for the first £12,300.
For filing your tax return, you can make a record of your transactions or ask for a PnL statement from your broker. Another important issue to keep in mind is that you can ask for tax relief if you incur losses from your trading activity.