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So, do forex traders pay tax? As you might imagine, the question isn’t as simple as it sounds. The majority of forex traders lose money, so it’s not in HMRC’s interest to allow everyone to offset their losses against their other income.
As a result, there are different rules for different trading instruments. And it all also depends on your profits.
There are four types of tax that are relevant to forex traders:
This guide is for sole traders and those who do trading as a side gig to their full time employment.
If forex trading is a side gig, you are covered by the Trading Allowance. It allows you to earn up to £1000 of extra income tax-free. Anything that you earn in profits over £1000 will be taxed at the standard 2020/21 Income Tax rates.
|Up to £12,500||0%||Personal allowance|
|£12,501 to £50,000||20%||Basic rate|
|£50,000 to £150,000||40%||Higher rate|
|over £150,000||45%||Additional rate|
As a full time self-employed investor, you’ll be taxed on all of your profits over the tax-free Personal Allowance.
You’ll need to register as self-employed by declaring your income to HMRC by 5th October. After this, you will pay the tax you owe via a tax return.
Read more about the Self Assessment tax return process here.
The type of instrument that you trade with affects the way that you’re taxed.
Spread Betting, for instance, is classed as gambling. As you don’t own the assets you’re betting on, you’ll not be liable to pay Capital Gains Tax or Stamp Duty on the money you make from it in the UK.
Contracts for Difference (CFDs) are a little different in tax terms. Whilst you don’t have to pay Stamp Duty on CFDs, you will be liable to pay Capital Gains Tax when you buy and sell them.
Take a look at our Capital Gains Tax calculator to see what you might owe.
First £12,300 are tax-free.
£1,000 taxed at 10%: £100
£6,700 taxed at 20%: £1,340
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Your total capital gains tax (CGT) owed depends on two main components:
Your overall earnings determine how much of your capital gains are taxed at 10% or 20%.
Our capital gains tax rates guide explains this in more detail.
In your case where capital gains from shares were £20,000 and your total annual earnings were £69,000:
You pay no CGT on the first £12,300 that you make
You pay £100 at 10% tax rate for the next £1,000 of your capital gains
You pay £1,340 at 20% tax rate on the remaining £6,700 of your capital gains
Yes, there are a few things to consider when working out whether or not you might owe tax on your trading profits.
First of all, there are expenses. If you’re a full time trader and you’re not claiming the Trading Allowance, you’re allowed to deduct your expenses from your income when you work out your taxes. Allowable expenses are basically anything that you’ve spent wholly, exclusively and necessarily on your trading business.
Secondly, you should consider the size of your trading business. Questions like the below are important to ask yourself when questioning whether or not you owe tax:
If you’re earning a lot from trading and you’re not yet paying tax on your profits, the chances are that HMRC will come knocking before too long.