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Spread Betting Tax Us

Do I Have to Pay Tax on Spread Betting?

Key Points: Do you pay tax on spread betting?

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The image of spread betting as a gambling activity is carried on through the way in which spread betting gains are taxed in the UK, and for the purposes of tax, it remains quite a useful association. Remember – spread betting isn’t really gambling insofar as you can legitimately predict the outcome with logic and reason (rather than relying solely on chance or an individual performance), but as far as the UK tax authorities are concerned it’s a straightforward wager. Tax treatment might seem like an ancillary issue, but it’s actually extremely important, and can make the difference between a profitable trade and an unprofitable one, and the favourable tax treatment of spread betting ultimately leaves more of your earnings untaxed.
Financial spread betting is only available in the UK and Ireland – no Capital Gains Tax*, no Stamp Duty, no Income Tax
Spread trading is regulated by the FCA but treated as a gambling activity for tax purposes
In other countries, such as the US and Australia, you would need to use other trading products such as CFDs or futures
To start examining the way in which spread betting is taxed, let’s look at how traditional share transactions are taxed as a basis for comparison. Bear in mind, it is possible to spread bet on the performance of individual shares where offered by your broker, thus it is plausible that you could invest in exactly the same trade in the share and spread betting markets with entirely different results.
A share transaction sees the transfer of ownership in a share, an asset. For starters, shares in the UK are liability to the payment of Stamp Duty, a form of tax that is applied on the total value of a transaction, expressed as a minimal percentage – for example, Stamp Duty for shares sat at 0.5% of transaction size. Particularly for leveraged transactions, this can be a significant tax liability to pay on each and every transaction over the threshold value. Without going too far into the intricacies of Stamp Duty and how it is calculated, this liability can be instantly removed from the equation when dealing with spread betting.
In order to realise a profit on a share transaction, you generally have to resell your shares, and this speculation with the intention to resell tends to be the core reason for most share purchases. This is where the most considerable tax burden comes into play – at the point of disposal. Capital Gains Tax is paid by UK individuals on any gains made on the disposal of capital. Effectively, CGT performs the same function as income tax on capital profits, and is charged at different rates depending on your level of capital and income. Not only is CGT expensive, but it is also highly complicated, and can be a significant administrative burden for traders, not to mention its financial impact.
In spread betting, no assets are changing hands, no transaction is taking place, no assets are being sold. It’s merely an intangible bet, or agreement between the trader and the broker, and it is taxed as a pure gambling activity – that means at a rate of 0%. The exception to the rule is where spread betting forms the core of your day to day income, at which point you will be liable to income tax on your earnings as with any other trade, business or job; in other words, you only pay tax if you run spread betting as a business. However, as a starting point this can save a substantial proportion of your profits from the hands of the taxman, leaving more cash in your pocket at the end of the day.
Assume the rate of CGT (Capital Gains Tax) is 20% and Stamp Duty is charged at 0.5%, (with all other reliefs and allowances exempted for simplicity’s sake). Buy 1000 £1 shares in Company X which you sell for £1.05 would yield a profit of £50, less 20.5%, which leaves £39.75 in profit. With a spread betting transaction on the same shares, you would be more considerably leveraged, earning a 500% return, which in turn would be tax free.
The significant savings afforded by the more preferable taxation of spread betting gains are one of the major pull factors for traders, and particularly when combined with the leverage effect of spread betting, can have a dramatic impact on the profitability of your trading activities.
Question: Are spread bets tax deductible?
Answer: Spread bet profits are tax-free and you get to keep all your profits but you can’t offset those losses against other capital gains. Let’s look at the example below.
Let’s look at the following scenario: you want to sell some equities and make a nice profit of £50,000 but at the same time you had a £50,000 investment in shares of another company which just went bust. In this case, you can offset your capital losses against capital gains, thus you have £0 net capital gain and you pay £0 in CGT.
Same scenario but this time you spread bet on shares: As financial spread betting is tax free, you can’t offset your losses against capital gains and thus you’d still have to pay Capital Gains Tax on the £50,000 profit you make from the sale of equities, even though you actually made no profit from these two transactions.
Question: Is financial spread betting really tax free?
Answer: Yes, this type of trading involves no taxes and you don’t need to report any profits or losses to the HMRC, just like with any other gambling activity.
Question: Is there any tax in the EU or Australia?
Answer: Financial spread trading is only available in the UK and Ireland, in other countries you would need to use other trading instruments such as futures or shares and these products are subject to tax.
Answer: Unfortunately, more than 70% of traders lose money and since spread bet traders can’t offset those losses against capital gains, the taxman in the UK actually benefits from this regime. Also, as spread betting falls under the gambling regime, the taxman collects more tax from your provider.
One of the key advantages of spread betting is that it is taxed accordingly to considerably more favourable rules than other forms of trading. Essentially, spread betting is regarded by UK tax law as a gambling activity, and therefore the profits from spread betting are tax free – i.e., there is no capital gains tax to pay on the earnings generated. Because spread betting is based on asset prices, rather than trading in the assets themselves, it is also exempt from stamp duty, which when added to the CGT savings makes spread betting an even more attractive investment style.
Spread betting can attract tax liability in the instance that it becomes the trader’s main source of income, at which point earnings are subjected to income tax according to the normal income tax laws. However, for the most part spread betting is a potentially highly lucrative, tax free form of trading.
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You are here: Home > Trading FAQs > Is spread betting tax free if its your sole source of income?
I know that the spread betting companies say that it is a tax free product because it is classed as betting rather than trading, but do you have any knowledge of the tax mans view on spread betting for a living as a sole source of income? I won’t be using the leveraged side of spread betting, it’s just the tax free part that sounds good to me. I like the idea of not having to pay tax, but it just seems too easy.
I think that it is pretty clear that someone who pays tax on another income source will never have a problem if they make money via spread betting. The crux of the matter really relates to an individual who makes their sole income through spread betting.
‘To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done.’
The way I understand it is that there is no tax on spread betting winnings. That means no tax on gains, but also means you cannot offset your spreadbetting losses, unlike ‘normal’ share/bond trading or CFDs.
Of course, the Inland Revenue (HMRC) has the power to look at tax payers’ circumstances at an individual level if they are of the opinion that someone’s circumstances are unique or rare. In this respect I have little doubt that HMRC could deem a very successful spreadbetter as being ‘rare’ if it thought that it would help their case.
Having said that, I’m confident that the case of any possible Inland Revenue investigation against the ‘professional gambler’ would rest largely on the ethical principle; that persons conducting themselves in such a way by which they gain an income which they make a living on and should thereby be obliged to pay income tax on that money. This in practice means that some tax inspectors might provide advice which is 100% mechanical in nature where another may well introduce an element of ‘ethical principle’ (i.e. is it fair that someone might earn (win) £100k and not pay a penny in tax)?
Let’s assume that you earned £50, at the weekend, stacking shelves in Tesco but, traded 12 hours a day during the normal working week. Your profits, from trading, amounted to approximately £5,000 per week and you made 10 trades each day; what would HMRC consider to be your primary occupation and income source?
The shelf stacking in Tesco’s? Unlikely, I think…
“Try giving HMRC a call and see whether you ever get a clear-cut reply. I mean, you’re hardly likely to get a nice honest person at the IR saying all perky down the phone ‘yes sir that’s correct, go and make as much money as you can and you wont owe us a penny! Good luck sir!!!'”
Although I can understand both facets of the argument I’m not sure that the ethical standard could be used in a case which went as far as court. So long as the person in question could show that he / she was following the law then they wouldn’t have a case to answer. As far as I know there is nothing in law which states that someone must ‘pay’ income tax – instead the law requires that someone is ‘assessed’ for income tax – an assessment doesn’t mean that liability is always found.
You see there’s an absolute exemption from CGT and Stamp duty, but it is a potentially grey area where income is concerned. If spread betting profits constitute subsistence income, then it could be an issue. No clear cut answer. HMRC contains the same number of unambitious clock watchers as any other government department (that is when they are not on the sick) and most tax offices will be unable to give a sensible answer. You would probably need to be subject to an investigation before your status could be sensibly considered.
Having seen part of the rules regarding spread betting posted in a discussion board and they are cryptic, very cryptic. They are open to interpretation, deliberately so in my opinion. In my own experience government departments (DVLA, Inland Revenue etc) tend to overstate their powers and also make up their own ‘rules’ as they go along. It is up to the tax inspector to interpret these regulations and make a ruling on your tax position.I’m sure that many people wilt under pressure and just play ball but sometimes it is good to challenge them. The problem is that the only way to do that is to refuse to pay any tax! You can see the problem – it would be good if there were a couple of high profile cases which went to court.
Anyway, it seems the consensus seems to be that spread betting gains are tax free and in most cases you won’t ever be confronted by the Inland Revenue about not declaring it and frankly if you are confronted you probably stand a good chance of winning due to a little thing called ‘law’. Secondly, if the Inland Revenue were to starting considering gamblers for taxation via Income Tax then they’d have no option but to offer relief on losses. Since there is nothing to stop people having more than one business or trade anyone who gambled would thus be able to deduct losses (from gambling) from their taxable income. This would cost the Inland Revenue a fortune.
Having said that apparently no one has ever been convicted of not paying tax from spread betting earnings. Big companies such as IG Index pay huge amounts of corporation tax which may help to explain why this is the case. In Las Vegas (complete aside I know) they pay just 8% tax total as all the big casinos pay Federal and State taxes hence it’s the fastest growing state in the USA! Apart from anything else, as the majority of spreadbetters lose, HMRC will find raking in tax from the providers much more worthwhile (and easier) than chasing around after the few people who actually manage to make a sizeable profit.
In any case my advice is to stay under the radar and don’t say anything unless the Inland Revenue presses you. Which means it is a good practice to keep all paperwork in case you’re ever challenged by them. And maybe speak to a recommended tax adviser in the meantime to put the full stop on it.
Is it a requirement to mention spread betting on the tax returns even if it tax free?
There is no requirement to show spread betting ‘earnings’ on a return. Such a return would be incorrect. I have never come across a return which clearly shown spread betting earnings, but if one was received it would probably be processed normally since the term would probably mean little to those who do the processing, hence it is unlikely that it would be picked up for formal inquiry on this reason alone. The fact that a return has been processed does not imply any agreement on HMRC’s part.
You can present the full facts to HMRC in a letter and receive a written ruling by which they would be bound, if you have particular concerns. Or you could pay your ‘accountant/tax consultant who specialises in these things’ to do this on your behalf.
In any case if you are serious about this, seek advice from a competent and qualified professional.
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A: The simple answer is yes. Spread betters escape the 18 per cent capital gains tax that shareholders must pay on trading profits (capital gains amounts to the difference between what you pay for an investment and what you eventually sell it for). There is also no stamp duty and no commission on each trade apart from the spread. Not having to pay capital gains tax is a great advantage as it means that you can factor an additional 18% return on your trading profits since you will be saving monies that would have otherwise gone to the tax man. Moreover, with spread betting there is no income tax on dividends; which is levied at rates as high as 50% for high income earners.
However it is important to point out that spread betting may only be tax free if it is not your main source of income. For that reason it is probably not wise when opening a spread betting account to put your job description down as 'day trader' or 'trader' as it would then be rather difficult to claim at a later date that trading was not your main income if the Inland Revenue was to query where you made your money!!!
I actually spent ruddy ages trying to establish the position of spread betting with the revenue, and in the end it was pretty clear - perhaps this will ring true with those who have investigated this with the revenue themselves? If you have a 'subsistence income' (i.e. enough to live off) from an independent source that you pay tax on, then HMRC can't tax you on your spreadbetting activities. It's only if you have no other source of income and you use it for your primary income source that the tax advantages may disappear. Spoke to the revenue office in Nottingham with a technician there, who specialize in people who make a living from gambling, so I guess he knows his stuff. He deals with people playing the horses, dogs, poker, even casino games (!).
The bottom line is that if you are a tax payer who wins at spread betting (or any other forms of gambling for that matter!) you should not be liable for tax on winnings. If you do not have any other regular taxable income other than gambling you will probably be classified as a professional gambler (your trade) and may loose your BIM22017 exemption. In any case if you are employed and pay PAYE you cannot be classed as a professional gambler and so do not need to pay tax on gambling winnings even if they exceed your employed income. The reason HMRC are reluctant ot classify anyone as professional is that a professional gambler could then claim relief against losses from gambling and against the spreadbet companies proportion of their gambling tax.
The vast majority who spreadbet, I would opine, do not do it for a living, and therefore they are completely safe from taxation. Those who do it for a living have enough cash to hire clever accountants who sort it all out for them. Nothing to stop a millionaire trader having a self-employed 'subsistence income' from a bit of consultancy work that he pays tax on. The revenue can challenge it, but due to the nature of current legislation, they're unlikely to win. Thing I discovered after starting work in the Financial Services industry is that tax law is much more open to interpretation than I ever imagined beforehand!
That said, I have never heard of anyone being taxed on spread betting but then people probably don't advertise the fact.
A: Spreadbets are treated differently to contracts for difference. The providers that offer spread betting pay betting duty direct to the HM Revenue & Customs, so the bid-offer spreads tend to be slightly higher to cover the tax. From 6 October 2001 there has been a 3% general betting duty charge on the financial spreadbet company's net stake receipts (that is, the total of all bets received, less any winnings paid out). As such the taxman will treat any gains from spread betting activities as tax-free but this also means that losses cannot be claimed against other income.
Contracts for difference on the other hand have a lower spread and providers to not pay betting duty. But this also means that any realised profits are subject to CGT and therefore exempt from tax on about the first 9k. There is also a risk that if you are professional CFD traders the tax man might argue the point that profits are subject to income tax rather than CGT in this instance.
This is just a basic guidance, seek a specialised accounting firm for advice.
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