CFD Tax UK: Should You Pay Them?

June 11, 2020
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Contracts for Difference (CFD) will allow you to create diversified investment portfolios. When you trade CFDs you can use margin accounts. In other words, you will have access to leverage that will allow you to take advantage of great investment opportunities because you will be able to access more than your initial capital. Furthermore, in this article about CFD Tax UK, you will also see that CFD transactions are instantaneous and offer high liquidity and the possibility that you can determine if you made profit or loss every day. All these elements have made CFDs in the UK very popular and for this reason, it is very important to determine the tax implications when you trade with these types of instruments.

If you are an investor that uses CFDs or you are thinking of investing your capital in these types of instruments, the best thing for you is to complement your strategies with expert financial advisory services. In this way, you will be able to make better decisions, choose the best balance between risk and capital, and structure profitable investment plans. We recommend Capitalist Exploits financial services because it will allow you to have a broader view of the market. In fact, Capitalist Exploits provides information and analysis into investment opportunities that have the potential to provide impressive gains without taking on additional risk .

#1 What Is A CFD

Before talking about CFD Tax UK, it’s important that we cover a couple of definitions. CFD is the acronym for “Contract for Difference” and consists of buying or selling a contract where the profit or loss is given by the difference between the entry price and the closing price of the position.

The result of your investment will depend on the evolution of the price of the underlying asset. In this sense, if the price of the underlying asset rises, you will make a profit with the CFD. If the price of the underlying asset decreases, you will lose money with the buy of the CFD.

Please, note that buying a CFD does not actually mean owning the underlying asset. There are a large number of CFDs due to a large number of financial assets on the market that can be converted into the underlying assets of a CFD.

Most Popular Underlying Assets To Trade With CFDs

  • Stocks (Apple, Tesla, Google, Facebook, Amazon).
  • Raw materials (Gold, Oil, Natural Gas, Silver, Platinum).
  • Crypto assets (Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Cardano (ADA), XRP).
  • Currencies (EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CAD).
  • Indices (GER30, NSDQ100, DJ30, SPX500, FRA40).
  • ETF (SPY, VXXB, TLT, HMMJ, QQQ).
CFD Tax Uk

Thanks to this large number of possibilities, a CFD will allow you to create diversified investment portfolios. That is, they allow structuring strategies that have the potential to generate profits. Another important element to take into account is that CFD transactions are instantaneous and offer high liquidity. For example, in the case of CFDs on stock indices because they have high acceptance in the market. Also, a CFD allows:

1.1 Investment With Margin

With a margin account, you can borrow money within the investment platform with the intention of trading financial instruments such as CFDs. This way you can take advantage of great investment opportunities in specific instruments that will allow you to generate profits. The margin account will allow you to generate leverage many times higher than your capital. For example, a leverage of 1:30 indicates that for every pound of capital you will have access to 30 pounds of leverage to invest.

1.2 Buy Fractions Of Stocks

You are not actually the owner of the underlying asset when you buy a CFD. In this way, a CFD allows you to buy or sell a fraction of an underlying asset because you are investing in the evolution of the price of the underlying asset. For example, thanks to this feature you will be able to get fractions of stocks that are highly-priced for capital levels of retail investors that are beginning in the world of trading.

We recommend our articles “eToro Review: Multi-Asset Social Trading And CopyTrading Platform”. There, you will see how to use investment platforms to trade a lot of financial instruments such as CFDs. You will also find some interesting tips that can help you when devising investment strategies.

#2 CFD Tax UK

Her Majesty’s Revenue and Customs (HMRC) is the department responsible for the administration and collection of, among others, Income Taxes, Corporation Tax, Capital Gains Tax, and Inheritance Tax. The first thing you should do to find out if you must pay any type of tax when operating with CFDs is to consult the official HMRC page.

For HMRC the term contract for differences (CFD) is defined 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.

In this sense, in the UK a CFD refers to a contract that allows obtaining a financial profit. Also, the total profit is calculated by subtracting the sale value from the original buy value.

2.1 Do You Pay Tax On CFD Profits In UK?

You may need to pay Capital Gains Tax if you make a profit with a CFD. Essentially a CFD is a contract whose value depends on something else, but it is not simply a bet. Therefore, a loss under a contract for differences must be legally enforceable.

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The Capital Gains tax-free allowance is:

You can see tax-free allowances for previous years. You may also be able to reduce your tax bill by deducting losses or claiming reliefs.

2.2 CFD Tax UK: Work Out Your Gain

Your gain is usually the difference between what you paid for your business asset and what you sold it for. Use the market value instead if:

  • Gave it away (there are different rules if it was to your spouse, civil partner or a charity).
  • Sold it for less than it was worth to help the buyer.
  • Inherited the asset (and don’t know the Inheritance Tax value).
  • Owned it before April 1982.
  • If the asset was given to you and you claimed Gift Hold-Over Relief, use the amount it was originally bought to work out your gain. If you paid less than it was worth, use the amount you paid for it.
  • The rules are different if you need to report a loss.

2.3 CFD Tax UK: Who Should Pay?

You pay Capital Gains Tax if you’re a self-employed sole trader or in a business partnership. Other organizations like limited companies pay Corporation Tax on profits from selling their assets. Please note that if total gains are less than the tax-free allowance, you do not have to pay tax if your total taxable gains are under your Capital Gains Tax allowance.

3.4 Tax On Day Trading UK

Day trading is one of the most popular trading strategies in the UK because it allows buy and sale of financial assets during the same day. Also, an attractive factor of this technique is that at the end of each day it is possible to determine the profit or loss that has been obtained.

However determining the tax payment requires that you do a rigorous review. Although, the HMRC website is really impressive, the deal for CFD Tax does not appear to be very clear. Even so, it does not seem very difficult to reach a conclusion if it is assumed that:

  • A CFD is treated like any stock when declaring earnings.
  • Day trading with CFDs is an activity that generates profit.
  • Day trading is a trading strategy. Although it is possible to determine profits every day, the tax declaration is annual.

In this sense, we think that the logical answer is that tax on day trading is a taxable event as we have described throughout this section. But, take into account that tax legislation may change in the future. We recommend that you are always alert to possible changes in the legislation and that you seek the help of professionals.

We recommend you read our article “How To Start Day Trading: Generate Returns During The Same Day“. There you will find short-term strategies, indicator analysis, the best way to create a trading plan and many more tips that will allow you to increase your skills as an investor.

#3 CFD Tax UK: Factors To Consider

If you trade CFDs and also use day trading strategies, it is important that you follow the next tips so that you can face your tax return without any problem.

PRO-TIP #1: Keep Track

Keep track of the instruments you are trading. This allows you to classify the instruments to determine the cases in which you must pay taxes.

PRO-TIP #2: Be Thorough

Be thorough when saving your history of buy and sale dates, prices and even market entry and exit points of the financial instruments with which you trade.

PRO-TIP #3: Use Software

There are different software and calculators that will save you a headache when calculating your taxes.

PRO-TIP #4: Check The HMRC

Do not hesitate to check the HMRC page, it is really useful. You will find a lot of relevant information about your taxes.

PRO-TIP #5: Save Information

Save your trading history. This will allow you to search for any information that you need to review.

PRO-TIP #6: Seek Expert Help

If you are not completely clear about your tax return, do not hesitate to seek expert help.

CFD Tax Uk: Factors to consider

#4 Do You Need A Financial Advisor When Investing In CFDs?

Keep in mind that CFDs are complex instruments that require you to choose the best investment strategies. For this reason, you should not buy a CFD lightly, or because everyone talks about its evolution. You should always do an analysis to make the best decision.

You should complement your investment ideas with the recommendations of a qualified advisor. In fact, we suggest our post “Capitalist Exploits: A Measured Approach To Achieving Asymmetric Returns“. There you will learn much more about investing and get great recommendations. In it, we cover the type of content and services Capitalist Exploits offers, how it works, and what markets they recommend you invest in.

Below you can see a summary table with the main features of Capitalist Exploits:

Characteristics Capitalist Exploits
How do they select investments?Capitalist Exploits seeks investment opportunities worldwide through in-depth analysis, market research, and investment networks.
The team looks for the best investment opportunities in different sectors, industries and global markets.
Then they determine if the opportunity can be safely seized. After identifying opportunities, they estimate the risk associated with each investment to select the best risk-capital ratio.
The next step is to identify the most appropriate way to allocate capital in each scenario. In this way, investors can adapt to possible changes.
Are the recommendations diversified? Yes, they provide a high level of diversification because Capitalist Exploits seeks investment opportunities worldwide in and out of the stock market.
Do they help you analyze each recommendation? Yes
Do they generate free content? Yes, the company offers free content and a blog with highly relevant podcasts and opinion pieces. Capitalist Exploits also offers a private Telegram channel called “Hedgies Uncut”. There, hedge fund managers discuss their investment positions and ideas.
What type of investor is it for? Anyone with any level of experience or geographic location can use the service. It is ideal for both long-term and short-term investors who are looking for investment opportunities in and out of the stock market. For example, shipping, energy, natural resources, Bitcoin and many more.

CFD Tax UK In A Nutshell

  • CFD is the acronym for “Contract for Difference” and consists of buying or selling a contract where the profit or loss is given by the difference between the entry price and the closing price of position.
  • Buying a CFD does not imply owning the underlying asset.
  • A CFD will allow you to create diversified investment portfolios.
  • Her Majesty’s Revenue and Customs (HMRC) is the department responsible for the administration and collection taxes.
  • In the UK a CFD refers to a contract whose purpose is to secure a profit or prevent loss.
  • You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance. The Capital Gains tax-free allowance is £12,300.

CFDs are complex instruments that require you to choose the best investment strategies. For this reason, you should buy a CFD with consciousness. Always analyze to make the best decision.

We recommend a reputable and reliable investment advisor. If you are just starting out in the investment world, or are already a professional, but don’t want to be exposed to high risks, we recommend that you join Capitalist Exploits today for three reasons:

  • The first is that Capitalist Exploits provide an incredible amount of information about financial markets that help beginners learn.
  • The second is that Capitalist Exploits is focused on identifying high-return, low-risk investment opportunities, which is exactly what someone who is just starting out on business needs.
  • Finally, the level of diversification offered by Capitalist Exploits will allow you to create more efficient portfolios to achieve your goals.
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