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What are the CFD trading tax implications?

We've updated this guide on 6th April 2021

With the popularity of Contracts for Difference (CFD) on the rise in the UK, it’s important to know about the CFD trading tax implications that come with them. When traded correctly, they can be a great way to create a diverse investment portfolio. 

However, like any trading instrument, it’s important to know about the risks and rules surrounding taxation before you start investing. We’ve put together an easy guide to explain all you need to know about the CFD trading tax implications below.

What is a CFD?

Before we dive into the CFD trading tax implications, let’s start by explaining what a CFD actually is. 

A CFD is a type of financial contract that pays the difference in the settlement price between the open and closing trades. HMRC define it as: 

‘A contract whose purpose is to get a profit or avoid a loss by reference to fluctuations in:

  • The value or price of the property to which the contract refers
  • An index or other factors designated in the contract.’

The outcome of a CFD investment completely depends on the evolution of the price of an underlying asset. For example, if the price of the underlying asset rises, you’ll make a profit. If it decreases, you’ll lose money. 

Some of the most popular underlying assets to trade with CFDs include:

  • Stocks
  • Raw materials 
  • Currencies

Cryptocurrencies and digital assets

CFDs have the potential to generate profits and help investors build a strong trading portfolio. If you’re thinking of starting CFD trading, then there are a few tax implications that you should know about first.

CFD Tax top tips

  1. Remember to keep track of all the instruments you’re trading. Be thorough when saving your history of buy and sale dates, prices and even market entry and exit points. If you don’t, it’ll be harder to calculate what tax you’ll need to pay on your profits
  2. Save all your trading history. This allows you to search for any information that you need to review
  3. Seek professional help if you’re unsure about your tax return. There are plenty of online tax return services (like TaxScouts…) that can make sure you pay the right amount of tax and on time!

CFD trading tax implications

Are CFD profits taxable?

If you trade CFDs, you might be wondering if you have to pay tax on any profit you make. One type of tax you might have to pay is Capital Gains Tax (CGT).

As an individual, if you’ve made a capital gain on a CFD above the CGT allowance, then you need to file a Self Assessment tax return to declare this profit and pay tax on it. 

However, if it’s your limited company that has made a profit on a CFD, and not you individually, then you will have to pay Corporation Tax. You’ll pay tax on any profits your company makes from selling these types of assets. 

How much tax will I pay?

You’ll only have to pay Capital Gains Tax (CGT) on your overall gains above your tax-free allowance. Your gain is the difference between what you paid for your asset and what you sold it for.

In the 2021/22 tax year, this CGT allowance is £12,300, or £6,150 for trusts.

If you want to know the exact amount of CGT you’ll pay on your CFD, use our Capital Gains Tax calculator below!

Where did you get profits?
Profits from capital gains
£
Annual income
£
Outside of capital gains
Select tax year
Profits after tax
£18,560
CGT
£1,440
Profits from selling shares
£20,000
Capital Gains Tax (CGT)
£1,440

First £12,300 are tax-free.

£1,000 taxed at 10%: £100

£6,700 taxed at 20%: £1,340

Your profits after tax
£18,560

Hey there! We really hope this calculator helped you. Tax matters can be a dreadful topic at times. We know. That’s why we started TaxScouts.
A stress-free way to getting your taxes done.

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How your capital gains tax is calculated

Your total capital gains tax (CGT) owed depends on two main components:

  1. How much you earn in total
  2. What type of assets you sell

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:

Capital gains tax (CGT) breakdown

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

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