Personal Tax and Forex Trading

As the old saying goes, death and taxes are the only absolutes, and before you step into the world of financial trading it is certainly worth your while taking the time to understand how at least your taxes will be affected.

For a lot of people, the idea of getting stuck into forex trading platforms like CMC Markets can be a daunting. Often it’s the idea of the risk involved, for some it’s the intricate nature of the enterprise and for others it’s the added complications to what may already be a complex financial situation.

Assessing Your Own Situation

First and foremost you have to assess where you stand in terms of paying tax. What are you already paying, what other income you do have and what are you expecting to earn from forex trading are all questions you need to ask yourself. Anything that is defined as trading is taxable in the UK and trading is generally defined as any trade in which you intend to make a profit.

If you change up some currency after your holidays at a favorable rate, you may make some incidental money but the transaction wasn’t made by you for the purposes of profit so no need to declare it. Any serious trading done in foreign markets would be seen as legitimate trading though and as such any profits made would be taxable. It’s also important to mention that whilst any profits are taxable, any losses will also be relievable.

Trading vs Investing

The difference in taxes applied to forex traders versus forex investors is a marked one. As an investor you are subject to CGT at the annual rate of 18% as well as a tax exempt amount of profits of around £10k. As a forex trader you are subject to as much as 40-50% taxation on profits over £150k.

The assumption tends to be that if your sole income is through forex trading then you are a trader but that is not always the case. The normal position with forex, as with shares and other financial assets, is that you are an investor; you need to be involved in an organized trading operation before you are classified as a trader and liable for the higher rate of tax.

It should be noted here that in most cases, an investor will be liable to pay capital gains tax when he or she sells shares for a profit. Likewise, a Stamp Duty Reserve Tax (SDRT) of 0.5 per cent is levied when any positions are purchased electronically. However, instruments such as a CFD trade will keep an investor in the market regardless of which direction a currency pair may move. It is wise to look into this option, for the capital gains tax on a lucrative Forex trade can very well be daunting.

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