Despite the notion that forex trading is a losing game (it’s estimated that as many as 70% of traders regularly lose money), it is possible to achieve a profit when investing in international currencies.
One of the main questions posed by traders is whether or not they have to pay tax on their forex profits, as this has the potential to eat into their earnings and undermine any key financial goals.
Unsurprisingly, the answer varies considerably, so we’ve created a brief guide to help you understand your tax requirements in a little more detail.
For the Speculative Trader – Do You Have to Pay Tax?
While forex trading is speculative by its very nature, a growing number of individuals invest in currency as a part-time or side gig.
In this instance, you’re covered to some degree by the Trading Allowance in the UK, which enables you to earn up to £1,000 of additional income (in addition to your main salary) income tax-free.
Anything that you earn in profits over £1,000 will subsequently be taxed at the standard 2021/22 Income Tax rates, including the basic rate of 20% when you earn up to £50,270 overall.
So, you’ll need to keep your total earnings in mind to determine your precise tax levy, as you’re allowed a certain amount of additional income without having to pay more to the UK Treasury.
What About Professional Investors?
If you operate as a self-employed forex trader who invests in currency as your primary source of income, you’ll be taxed on all of your profits over the standard tax-free Personal Allowance.
In this instance, you’ll have to register as self-employed by declaring your income to HMRC by 5th October.
After this point, your tax payment will be set according to the earnings declared via tax return, with the standard tax rates of 20%, 40% and 45% depending on precisely how much you accumulate.
As a professional trader, you should note that you won’t pay tax upon the completion of individual trades. Instead, you’ll pay a predetermined amount of tax on your overall gain at the end of the year, beyond any existing allowances that have already been accounted for.
Do You Pay Tax on Spread Betting and CFDs?
There are various vehicles through which you can trade currencies, with spread betting and CFDs two of the most popular.
However, your choice of vehicle impacts on you’re taxed, with spread betting classed as gambling and therefore not subject to capital gains tax or stamp duty as you don’t own the assets that you’re wagering on.
In the case of CFDs, you will be liable to pay capital gains tax when buying and selling currencies, although in this instance, you’ll remain exempt from paying stamp duty.