The United Kingdom has a long trading history, stretching back thousands of years. It's the birthplace of modern capitalism, and the London Stock Exchange is one of the largest stock exchanges by market capitalization in the world. So it should come as no surprise that forex trading is thriving in the U.K. – even after Britain's exit from the European Union. So - do you pay tax on forex trading if you're living in the UK? We investigate here...
Do you pay tax on forex trading UK?
Broadly speaking, yes - trading profits are subject to forex trading tax, with a few exceptions. The U.K. government's H.M. Revenue & Customs (HMRC) department states that forex trading is taxable. But there are still plenty of other factors to consider – and that's where we come in. We'll walk you through everything you need to know about tax on forex trading in the U.K.
Income Tax vs. Capital Gains Tax vs. Corporation Tax vs. Stamp Duty Reserve Tax
As a foreign exchange trader in the U.K., you probably already know that you'll pay tax on forex trading on any gains under one of four regimes. However, you may qualify for one or another automatically by virtue of the volume of trading or your employment status, so it's essential to understand the basics.
The first two are generally automatic: income tax and capital gains tax. Income tax is paid by private individuals on overall earnings, whereas capital gains tax is the tax you pay on profits realized when you sell assets (shares), for example.
Additionally, there are two other means of taxation: corporation tax and Stamp Duty Reserve Tax. Corporation tax is the tax paid by limited liability companies on earnings, whereas Stamp Duty Reserve tax is a one-time fee paid when purchasing shares.
Unfortunately, there's no clear way to determine which regime applies to your situation. But if you're operating as a serious trader, rather than speculating in the markets, income tax and capital gains tax are likely your best options.
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Trading forex as a side hustle (speculator)
The status of a trader is determined by how often they trade and how much time they devote to it.
Suppose you're trading forex as a side hustle. You can declare your earnings to H.M. Revenue and Customs (HMRC) using a Self-Assessment tax return.
But there is good news if you are trading forex as a side hustle. The Trading Allowance covers you for any profits you make under £1000. In other words, any money that you make from forex trading up to £1000 is tax-free. If you earn over £1000, those profits will be taxed at the 2021/22 income tax rates.
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Trading forex as a full-time job (investor)
You could get taxed at 18% or 28%, or even higher if you're actively trading, depending on how much you make. In other words, forex trading is your primary source of income. Look at the income tax rates here.
For the 2021-22 tax year, the starting point for calculating your tax bill is the Personal Allowance. This is the income you can earn before paying any income tax. As mentioned, this is £12,570.
If your trading income is below this threshold, you will not be taxed on it. However, if your trading income exceeds this figure, you must pay tax on forex trading activities.
U.K. forex taxes and your trading instrument
Taxes can be a confusing subject. But when it comes to tax on forex trading, several factors can affect how much tax you need to pay. Once you're aware of the various tax regimes in place, you can determine which category applies to you based on the type of instrument associated with each transaction.
You must understand how the different types of spread betting and CFD accounts are treated for tax purposes - so that you don't get caught out.
The first thing to say is that spread betting (as opposed to conventional trading) is tax-free in the U.K. HMRC regards spread betting as a form of gambling since you don't own an underlying asset. So if you're a U.K. resident, all forex profits from your spread bets are completely free of capital gains or Stamp Duty Reserve tax.
On the other hand, if you're trading Contracts for Difference (CFDs) or bitcoin, binary and other commodities, both capital gains and Stamp Duty Reserve tax will apply.
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How do you register as self-employed in the U.K.?
The first thing to do is to check if you are legally classed as self-employed. You are tagged as self-employed if your forex trading activity is considered a trade and makes more than £1,000 profit. If this is the case, you'll need to register as self-employed with HMRC.
HMRC will usually send you a Unique Taxpayer Reference (UTR) within ten days of registering as self-employed. You also need to keep records of your earnings and submit an annual Self-Assessment tax return online to HMRC every year. You can find out more about this on the Government website here.
Again, you're likely to have many expenses and costs, so it's also a good idea to look at what business expenses you can claim for tax relief when you start forex trading. You can find out more about this here.
If you earn less than the threshold, there is no need to declare anything to HMRC (although it would be wise to keep records of all expenses if they query it).
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Do you need an Accountant to help file your forex taxes?
The short and simple answer to this question is yes; you need an accountant to help you file your forex taxes.
The long answer is that tax compliance can be a real hassle, so much so that many people avoid reporting their earnings altogether. But getting caught failing to report your earnings can have severe consequences under the law.
If you are a serious or professional trader, you will most likely need to hire an accountant to help file your taxes. The reason is that there is so much more paperwork involved with filing as a professional forex trader. It's challenging for the average person to understand all the accounting and tax laws related to their trading activities, so you should consider hiring an accountant or tax advisor if your profits are significant.
An accountant will not only help you with filing your taxes, but they will also know how to do it in a way that maximizes your deductions and keeps you compliant with the latest tax laws.