Forex trading: taxation in the UK explained
Our ultimate guide to the UK income tax law for forex traders
If you want to become a forex trader in the UK, you should know what your tax responsibilities are under the UK income tax law. Is this type of income tax-free or should you report your earnings and pay the relevant tax? Let’s see when this type of income is not taxed and when it is subject to taxation.
First, note that you should 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. Also note that the tax year is from April 6 in the current year to April 5 next year, and the personal allowance on income that is not subject to taxation is £12,500.
The forex trading tax in the UK is one of the most trader friendly taxation systems. Take into account three aspects: how forex trading activities are treated, the type of instrument traded and how HMRC will record your status.
Know your status according to HMRC
How the HMRC treats your trading activity has significant implications for your tax liability. HMRC can classify the traders and their trading activities in one of the following categories:
Speculative trading is considered to be similar to betting activities and 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 since they are treated as general self-employed individuals. Make sure that you go through the losses which can be claimed if you are taxed as self-employed.
Private investor is someone whose profits and losses are subject to Capital Gains Tax (CGT).
Forex trading income under UK tax law: instrument types
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 difference (CFD).
If the trading activity is performed through a spread betting account the income is tax-exempt under UK tax law. Spread betting, from forex trader perspective, is the process in which the trader speculates about the price movements, based on broker prices, of an underlying asset, without actually owning the asset. The downside when your trading activities fall under the spread betting is that 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 it is paid by the spread betting providers (brokers).
If you trade contracts for difference (CFD), then you are subject to capital gains tax (CGT) on gains you earn from your trading activities. The capital gains tax rates for individuals in the UK are 10 per cent for basic rate taxpayers when their total income and capital gains are less than £50,000 (the basic rate tax bracket).
If you are in the higher tax band (your total income is above £50,000) then your profits will be subject to 20 per cent CGT. But don't be deterred from trading CFD immediately, because there is a tax allowance for the first £12,000 and this threshold should not be neglected.
For filing your tax, you can make a record of your transactions or ask for 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.
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
As 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 capital gains tax 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 with the CGS, the taxable gains earned from cryptocurrencies represent the difference between the purchase price and the sale price. The tax rate is the one applied for capital gains tax stated in the CFD section above. The 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 Bitcoins 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.
FURTHER READING: Trading Bitcoin for beginners
FURTHER READING: Cryptocurrency regulation in the UK: is Bitcoin legal?