Spread Betting Taxable
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Spread Betting Taxable
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Are you sure your spread bets are tax free?
The general assumption is that financial spread betting is tax free here in the UK (at least under the current tax laws). However, this isn’t always 100% the case. The crux of the issue seems to be the nature of your trades, as summarised here (taken from the Times)
HMRC will try to tax betting if it forms part of another trade. 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. This could happen if, for example, you were a professional stockbroker or share trader, in which case your spread-betting profits would probably be taxable.
Effectively, if spread betting is your main source of income, then this is considered trading and you will be taxed on these profits. Most spread betters should be fine, but it’s worth keeping this in mind if you’re considering moving into spread betting full time.
Is financial spread betting (be it derivatives, forex trading, whatever) gambling (hence not subject to tax), trading (hence subject to income tax) or investing (hence subject to CGT)?
Spread betting is essentially day trading with one important difference that no assets exchange hands – still if you get a market direction right you make money!
From BIM22015 “The taxpayer placing a spread bet is not normally carrying on a trade (see BIM22020 for exceptions). They are not taxable on the profits, nor do they receive relief for their losses.”
From BIM22020 “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.”
My interpretation of this is that if you do something else for a living, which makes you realise a bit of cash could be made from a certain spread bet, it’s not a trade. But if what you are doing day in day out is spread betting, then it is a trade…
In the past I thought HMRC considered it gambling whatsoever the amount of the gains but now I’m not so sure particularly if it is your main source of income. Naturally for a typical hoby spreadbetter, this is not much different than betting on sports – you win some, you lose some so HMRC didn’t like the idea of people being able to offset their gambling losses against earned income. But for the lucky few who consistently make profits, the situation is more complex and for those without a second income I think HMRC might argue that it was no longer gambling. This is only a problem for people who consistently make large amounts of money from doing it full time – particularly if you try to abuse the system by claiming the various tax benefits as they have no income (their “winnings” not being counted)?
Thus I believe that if you can show that you have a ‘real’ job or a difference source of income, they will mainly accept that. Or if you can convince HMRC that you do this only occassionally (ie I had a good three months winning run) and that you have now stopped, all these things put up obstacles.
So let’s say it is trading – particularly for very frequent transactions – certainly this isn’t investing from an outsider’s point of view.
To put it short, whilst the concept is sold as tax free I think it is dangerous to assume that it is a carte-blanche to do as much as you want and remain untouched. However, in general gambling isn’t trading, so simply wouldn’t be dealt with in the same way. The big problem for HMRC is that if they start to treat gambling as a trade, they will be hit with loss claims from the losers, and as there are more losers than winners it would become a very expensive exercise.
Is the fact that spread traders don’t have to pay tax fair? The fact is life isn’t fair. You can’t have fair because what’s fair for one man is unfair for another. Really fair would be every single person paying exactly the same tax regardless of what they earn but of course that would not be considered fair. It all started with the child allowance thingy. As soon as the prime minister claimed it to be fair it gave ammunition to the opponents. Now the latest thing is the spending review. It’s unfair for the poorest in society apparently but no one explains exactly why something is unfair compared to other sections of society (because they can’t). I read today that when I retire (as in state pension) next year my tax free allowance goes up by almost 50% from £6k to £9k. I think that’s unfair. When the young are paying for higher education why am I getting an increased tax allowance. To be fair, I think it’s unfair. This is how our tax system works. In any case generally speaking the few who pay the highest taxes do tend to benefit from tax reliefs and reductions. Attack them for being rich and the risk is they may take their wealth elsewhere.
Brilliant article back page of Telegraph Your Money section. Describes tax in terms of beer spend. Can’t find it online.
10 men go out for a beer once a month.
They decide to split the bill in a similar way to tax bill.
First four men (poorest) pay 0
Fifth pays £1
Sixth pays £3
Seventh pays £7
Eight pays £12
Ninth pays £18
Tenth (richest) pays £59
The pub owner decides to drop the price, their bill now comes to £80. What do they do to split the £20 fairly?
First four men (poorest) pay 0
Fifth goes from £1 to 0
Sixth goes from £3 to £2
Seventh goes from £7 to £5
Eight goes from £12 to £9
Ninth goes from £18 to 14
Tenth (richest) goes from £59 to £49
The sixth man points out that he only saved £1 out of the £20 but the tenth man got £10. The seventh man agrees, asking why he only got £2 when tenth man got £10. The first four men were also indignant saying “we didn’t get anything at all….the new system exploits the poor!”
So the nine men surrounded the tenth man and beat him up. The next month the tenth man doesn’t show.
When it comes to paying the bill they found they didn’t have enough money between them to even pay for half the bill.
And that, the article concludes, is how our tax system works. The few who pay the highest taxes do tend to benefit from tax reliefs and reductions. Attack them for being rich and the risk is they may take their wealth elsewhere.
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
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Dan Blystone is the founder and editor of TradersLog.com, as well as the founder of the Chicago Traders Meetup Group.
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Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but this remains banned in the U.S. Like stock trades, spread bet risks can be mitigated using stop loss and take profit orders.
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Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
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Spread betting is a derivative strategy, in which participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset's price will rise or fall, using the prices offered to them by a broker.
As in stock market trading, two prices are quoted for spread bets—a price at which you can buy (bid price) and a price at which you can sell (ask price). The difference between the buy and sell price is referred to as the spread. The spread-betting broker profits from this spread, and this allows spread bets to be made without commissions, unlike most securities trades.
Investors align with the bid price if they believe the market will rise and go with the ask if they believe it will fall. Key characteristics of spread betting include the use of leverage, the ability to go both long and short, the wide variety of markets available, and tax benefits.
If spread betting sounds like something you might do in a sports bar, you're not far off. Charles K. McNeil, a mathematics teacher who became a securities analyst—and later a bookmaker—in Chicago during the 1940s has been widely credited with inventing the spread-betting concept. But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic. A City of London investment banker, Stuart Wheeler, founded a firm named IG Index in 1974, offering spread betting on gold. At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it.
Despite its American roots, spread betting is illegal in the United States.
Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet. First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet.
For our stock market trade, let's assume a purchase of 1,000 shares of Vodafone (LSE: VOD ) at £193.00. The price goes up to £195.00 and the position is closed, capturing a gross profit of £2,000 and having made £2 per share on 1,000 shares. Note here several important points. Without the use of margin, this transaction would have required a large capital outlay of £193k. Also, normally commissions would be charged to enter and exit the stock market trade. Finally, the profit may be subject to capital gains tax and stamp duty.
Now, let's look at a comparable spread bet. Making a spread bet on Vodafone, we'll assume with the bid-offer spread you can buy the bet at £193.00. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move. The value of a point can vary.
In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price. We'll now assume a buy or "up bet" is taken on Vodaphone at a value of £10 per point. The share price of Vodaphone rises from £193.00 to £195.00, as in the stock market example. In this case, the bet captured 200 points, meaning a profit of 200 x £10, or £2,000.
While the gross profit of £2,000 is the same in the two examples, the spread bet differs in that there are usually no commissions incurred to open or close the bet and no stamp duty or capital gains tax due. In the U.K. and some other European countries, the profit from spread betting is free from tax.
However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets. Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost .
In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower. In the stock market trade, a deposit of as much as £193,000 may have been required to enter the trade. In spread betting, the required deposit amount varies, but for the purpose of this example, we will assume a required 5% deposit. This would have meant that a much smaller £9,650 deposit was required to take on the same amount of market exposure as in the stock market trade.
The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses. While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast.
If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically. In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher.
Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses .
Risk can also be mitigated by the use of arbitrage, betting two ways simultaneously.
Arbitrage opportunities arise when the prices of identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies to gain risk-free returns.
Due to widespread access to information and increased communication, opportunities for arbitrage in spread betting and other financial instruments have been limited. However, spread betting arbitrage can still occur when two companies take separate stances on the market while setting their own spreads.
At the expense of the market maker, an arbitrageur bets on spreads from two different companies. When the top end of a spread offered by one company is below the bottom end of another’s spread, the arbitrageur profits from the gap between the two. Simply put, the trader buys low from one company and sells high in another. Whether the market increases or decreases does not dictate the amount of return.
Many different types of arbitrage exist, allowing for the exploitation of differences in interest rates, currencies, bonds, and stocks, among other securities. While arbitrage is typically associated with risk-less profit, there are in fact risks associated with the practice, including execution , counterparty, and liquidity risks. Failure to complete transactions smoothly can lead to significant losses for the arbitrageur. Likewise, counterparty and liquidity risks can come from the markets or a company’s failure to fulfill a transaction.
Continually developing in sophistication with the advent of electronic markets, spread betting has successfully lowered the barriers to entry and created a vast and varied alternative marketplace.
Arbitrage, in particular, lets investors exploit the difference in prices between two markets, specifically when two companies offer different spreads on identical assets.
The temptation and perils of being overleveraged continue to be a major pitfall in spread betting. However, the low capital outlay necessary, risk management tools available, and tax benefits make spread betting a compelling opportunity for speculators.
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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 No Capital Gains Tax
From HMRC website: '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.'
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. This could happen if, for example, you were a professional stockbroker or share trader, in which case your spread-betting profits would probably be taxable .
Jan 7, 2021 Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free...
The good news is that, under most circumstances, you do not need to pay tax on your spread betting gains. You will not be charged capital gains tax and, even if spread betting is a significant source of your primary income, you will not be charged income tax. Your gains are also free from stamp duty and National Insurance contributions.
As things currently stand, spread betting is free from Capital Gains Tax and Stamp Duty in the United Kingdom for the vast majority of people who engage in it as an activity. The key thing to keep coming back to, though, is that the majority of people will have another source of income other than their spread betting profits.
Feb 9, 2022 Commonly, sports betting operators have revenue, known as hold, of 5 percent of the handle, which means that for every $100 you wager, the operator takes $5, of which they must pay taxes and expenses. The federal tax on that bet is $0.25, which results in an effective tax rate of 5 percent of GGR (and even more of actual revenue).
Because it is considered to be a form of gambling, income from spread betting is generally free of Capital Gains Tax. If you support yourself financially from another source of income, all the profits from financial spread betting are exempt from income 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.
CMC Markets' founder Peter Cruddas was quoted saying 'The taxman does very well out of UK spread betting , since he gets to take a clip of every trade. If they are waiting for the client to make money and declare a capital gain it could take forever.'. Meanwhile quoting Ian from Spread Co 'I can't see the tax free regime changing in ...
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