Forex trading is buying and selling currencies in the foreign exchange market. Forex traders can make profits or losses from the fluctuations in exchange rates between different currencies.
But how do I pay tax on Forex UK? The answer depends on several factors, such as:
- The type of forex trading instrument you use
- The type of forex trader you are
- The amount of forex trading income you make
- The amount of forex trading expenses you incur
In this article, we will explain how these factors affect your forex trading tax liability in the UK and how you can calculate and report your forex trading income and expenses to the HMRC (Her Majesty’s Revenue and Customs).
Forex trading instruments and tax implications
Forex trading can be done using different types of instruments, such as:
- Spot Forex: This is the most common type of forex trading, where you buy or sell a currency pair at the current market price.
- Contracts for Difference (CFDs): These allow you to speculate on the price movements of an underlying asset, such as a currency pair, without owning it.
- Spread Betting: This is betting where you predict whether the price of an underlying asset, such as a currency pair, will rise or fall.
- Futures and Options: These are derivatives that give you the right or obligation to buy or sell an underlying asset, such as a currency pair, at a predetermined price and date in the future.
Each instrument has different tax implications depending on how the HMRC classifies them.
- Spot forex and CFDs are subject to Capital Gains Tax (CGT), a tax on the profit or loss you make from selling an asset that has increased or decreased in value. The current CGT rates for 2021/22 are 10% for basic rate taxpayers and 20% for higher or additional rate taxpayers. However, you can also claim a tax-free allowance of £12,300 per year, so you don’t have to pay CGT on the first £12,300 of your gains. You can also offset your losses against your gains, reducing your tax liability.
- Spread betting is not subject to CGT or income tax in the UK, which means you don’t have to pay any tax on your profits or losses from spread betting. However, spread betting is only tax-free if it is not your primary source of income and if you are not trading professionally.
- Futures and options are subject to CGT at the same rates and allowances as spot forex and CFDs. However, futures and options also have special rules for calculating gains or losses, such as the 30-day and share identification rules.
Forex trader classifications and tax implications
Forex traders can also be classified into different categories by the HMRC depending on their trading style and intention. These categories are:
- Speculative traders: These traders trade forex for fun or as a hobby. They do not trade regularly or systematically and do not have a clear trading plan or strategy. Speculative traders are usually not taxed on their forex trading profits or losses because they are considered gambling activities. However, speculative traders may still have to pay CGT if they trade using spot forex or CFDs.
- Self-employed traders: These are traders who trade forex as a business activity. They trade regularly and systematically and have a clear trading plan or strategy. Self-employed traders are taxed on their forex trading profits or losses as income tax rather than CGT. The current income tax rates for 2021/22 are 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers. However, self-employed traders can also claim various expenses and allowances to reduce their taxable income, such as trading fees, equipment costs, travel expenses, etc.
- Professional traders: These are traders who trade forex as their primary source of income. They trade frequently and consistently and have high skills and expertise. Professional traders are also taxed on their forex trading profits or losses as income tax rather than CGT at the same rates as self-employed traders. However, professional traders may also be subject to national insurance contributions (NICs), which are payments that fund the state pension and other benefits. The current NICs rates for 2021/22 are 9% for class 2 and 4 self-employed earners and 12% for class 1 employees.
How to calculate and report your forex trading income and expenses
To calculate and report your forex trading income and expenses, you need to keep accurate and detailed records of your trading activities, such as:
- The date and time of each trade
- The currency pair and instrument used
- The amount and price of each trade
- The profit or loss of each trade
- The fees and commissions paid for each trade
- The expenses incurred for each trade
You can use online tools, software, or spreadsheets to track and record your trading activities. You can also use your broker’s statements or reports to show your trading income and expenses.
You must report your forex trading income and expenses to the HMRC by completing a self-assessment tax return. You can do this online or by post. The deadline for submitting your tax return is 31 January for online returns and 31 October for paper returns. You also need to pay any tax due by 31 January.
If you are unsure how to calculate or report your forex trading income and expenses, you should seek professional advice from a tax accountant or the HMRC.
Conclusion
Forex trading is taxable in the UK, but not all forex traders need to pay taxes. Tax liability mainly depends on trading instruments, trader classification, style, and intention of the trader. Forex traders can use spot forex, CFDs, spread betting, or futures and options to trade currencies.
Each instrument has different tax implications depending on how the HMRC classifies them. Depending on their trading style and intention, Forex traders can also be classified into speculative, self-employed, or professional traders. Each category has different tax implications depending on how the HMRC taxes them.
Forex traders must keep accurate and detailed records of their trading activities and report them to the HMRC by completing a self-assessment tax return. They also need to pay any tax due by the deadline.
Forex trading is a complex and dynamic activity that requires skill, knowledge, and discipline. If you are ready to trade forex with a proper tax plan, we wish you good luck and happy trading!
