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Do I Pay Forex Trading Taxes in the UK?
Updated: May 01, 2024
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Forex Trading Taxes in the UK: Income tax (tax paid by private individuals on overall earnings), Capital gains tax (tax paid on profits realized when you sell assets (shares)), Corporation tax (tax paid by limited liabilities companies on earnings), Stamp Duty Reserve tax (tax paid when you purchase shares).
Tax season is coming, and like many investors, you’re probably scratching your head wondering how to account for your income from forex trading. We’re willing to bet that when you began day trading, it was to minimize bureaucracy and confusion in your professional life - not add to it! - but the question remains: “How should UK residents account for forex trading profits?” The answer depends on a number of factors, including what kind of trading instrument you use, whether trading comprises your primary source of income and how seriously you trade.
In this article, we’ll delve into the details of forex taxation in the UK and explain when you need to pay - and when you don’t!
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Do I Owe Forex Trading Taxes in the UK?
Much of the confusion around tax payments and forex trading in the UK arises from the fact that traders across the country conduct business in broadly similar, but distinct ways, making it difficult to understand which rules apply to your specific situation. Some people trading in forex as a side gig may pay nothing, whilst others who trade as a primary business using the same instruments will face a hefty bill.
To better understand how HMRC evaluates your obligations as a forex trader, let’s take a look at the key factors taken into account in assessing your situation.
How to become a Forex trader – a full beginner's guideRules and Regulation
Licensing in the UK
Brokerage activity in the United Kingdom is licensed and regulated by the FCA. The country's main public legal institution imposes strict requirements on applicants:
- registration with Companies House
- payment of membership fees to a British bank
- maintaining an office within the jurisdiction
- preparing a document package to substantiate licensing objectives and compliance with all regulatory requirements
Investor protection in the UK
Investors in the UK are protected by the Financial Services Compensation Scheme (FSCS). The FSCS’ purpose is to pay traders compensation (up to £85,000 per client) in case a financial company goes bankrupt or is liquidated.
Taxation in the UK
If a trader’s profits are £50,000 or more, he must pay a 20% income tax. Profits under £50,000 are tax-free.
Forex Trading Taxation in the UK - How It Works
As a forex trader in the UK, you’ll be taxed on any gains under one of four regimes. Although you may qualify for one or another automatically by virtue of the volume of trading or your employment status, understanding the basics can help you understand how to structure your activity to maximize your profits whilst minimizing your tax obligations.
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Income tax - tax paid by private individuals on overall earnings
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Capital gains tax - tax paid on profits realized when you sell assets (shares)
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Corporation tax - tax paid by limited liabilities companies on earnings
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Stamp Duty Reserve tax - tax paid when you purchase shares
For purposes of this article, we’ll focus primarily on the income tax and capital gains tax regimes, since the majority of those trading forex operate as serious traders, rather than speculators. But how do you know which classification applies?
Speculator or Investor - What Kind of Forex Trader are You?
Whether HMRC considers you a speculative punter or a serious trader has significant implications for your tax bill. Someone who makes trades the same way others play poker enjoys tax-free gains, but also suffers the consequence of any losses. Those who fall into the category of business traders or investors must pay taxes on their earnings. They’re also protected from losses, however, able to offset poor trades against other business income or deduct them outright.
But what about capital gains and the Stamp Duty Reserve tax? Don’t worry, we’ll cover those later when we consider what kind of instruments you use to trade forex.
Case Studies
To illustrate the ways in which these three factors interact, let’s consider the following hypothetical individuals, all of whom traded forex during the 2023 tax year.
Ava enjoys her work as a freelance project manager, but finds the intellectual challenge of day trading exciting and occasionally engages in spread betting to make a bit of extra cash and keep her wits sharp. Due to the purely speculative nature of Ava’s activity and the specific instrument she’s chosen, HMRC considers her gains as gambling winnings, and she’ll pay neither personal income tax, nor capital gains tax, nor Stamp Duty Reserve tax.
Oliver works full time as a property manager, but also trades forex Contracts for Difference as a source of secondary income. He’s had some success, earling about £18,000.00 this year, but his income from trading isn’t enough to allow him to quit his day job just yet. HMRC allows Oliver to deduct £1,000.00 in personal allowance from his forex trading earnings, but he will pay personal income tax on the remaining £17,000.00 at the 2020-2023 Basic Rate of 20%. He is not required to register as self-employed or a sole trader with HMRC, but he also can’t deduct any trading losses against his income.
Ali makes a living as a full-time investor, supporting himself exclusively by trading in forex and other markets. This year, he realized £120,000.00 in gains from forex trading. Like Oliver, Ali may deduct £1,000.00 in personal allowance and will pay taxes on his remaining gains under the personal income tax regime, however he must also register as self-employed with HMRC and complete a Self-Assessment tax return. He’ll also need to pay capital gains tax on any CFD trading that exceeds the Capital Gains Tax Allowance.
Gemma owns a successful chain of ladies’ clothing shops, but also day trades in forex as a source of income. In 2023, Gemma’s clothing business earned £250,000.00, however she lost money in the market - about £25,000.00 worth. Fortunately, because Gemma trades forex with the intention to generate profits - as opposed to speculating - she has the option to offset her trading losses against income generated by her clothing business, thereby decreasing her overall liability.
One thing Oliver, Ali, Ava and Gemma have in common? Each sought the advice of an experienced tax professional prior to submitting a return. If, after reading this article, you have doubts about which tax scheme applies to you, we suggest contacting a licensed tax advisor or accountant with any questions to avoid hefty penalties from HMRC.
Who are the Best Forex Brokers in the UK?
One of the most significant challenges in preparing your tax return as a forex trader? Accurate records! In the event that HMRC requests additional information regarding your tax bill, you’ll want to ensure you have all the relevant information regarding each transaction ready to hand.
Using a forex trading broker not only simplifies the process of executing orders and sales, it also provides peace of mind come tax season. Licensed forex brokers must retain records of your transactions, making the accounting process less painful. Obviously, you’ll want to consider a number of factors when choosing a broker, however we recommend Admiral Markets and eToro.
Admiral Markets
Admiral Markets is a well-regulated and highly-regarded international broker with approvals from multiple agencies around the world, including the FCA. Low spreads and a low minimum deposit combined with over 3,900 assets to trade, there’s something for everyone, but especially those beginning to explore forex trading as part of a broader investment strategy.
For those focusing exclusively on forex, Admiral Markets offers an excellent range of currencies, including USD, GBP and EUR, making it much easier to avoid conversion fees. UK traders also enjoy a cash-back rebate program.
eToro
eToro is an Israeli fintech company and broker with approval from the FCA and other regulatory authorities around the world. If you prefer to specialize in CFDs, eToro may be the broker for you.
Likewise, those interested in cryptocurrencies will find ample support. New traders may also benefit from eToro’s powerful social trading tools, which allow investors to ‘mirror’ or copy the trades of seasoned investors with a proven track record.
Summary
With over 10 million traders operating around the world, the forex market represents an exciting opportunity for retail investors. Traders paying taxes in the UK can minimize the risk of an investigation or tax penalty by HMRC by working with a reputable broker, such as Admiral Markets or eToro and taking extra care when preparing a tax return.
Whether you opt to prepare your own return or enlist the assistance of a trained professional, traders should keep in mind the following criteria when accounting for forex trading gains and calculating tax obligations:
Am I a speculative trader? Or is this one of my sources of income?
What instruments do I use to trade in forex? Contracts for difference, or spread betting?
What’s my tax status? Am I a self-employed sole trader making a living by investing? Do I trade forex as one of several legitimate business activities? Or am I an individual trading forex as a secondary source of personal income?
At Trader’s Union, we support retail investors and traders by providing the most accurate and up-to-date information available concerning forex in the UK. Our mission: to empower private individuals to maximize their profit whilst minimising risk. Whether you’re an experienced investor or a beginner, Trader’s Union has the tools you need to protect yourself and your investment.
FAQs
How Do I Calculate My Forex Tax in the UK?
The question of how to calculate your forex tax depends largely on the kinds of instruments you used to trade forex. Remember, you won’t pay tax on spread betting, however you’ll need to tally up capital gains and Stamp Duty Reserve taxes for any CFDs. Let’s return to Ava and Oliver in our examples above:
- Ava traded forex using spread betting, which HMRC considers gambling and therefore tax-exempt.
- Oliver trades forex using a combination of instruments, but primarily CFDs. Where he uses spread betting to trade forex, he won’t pay taxes, but gains arising from CFDs will be subject to taxation either as personal income or capital gains.
Still in doubt about how to calculate your tax liabilities, we suggest consulting with a personal accountant specialising in investment and day-trading. Penalties for non-payment of capital gains taxes can be costly, and include additional fines for late payment on top of any fines. An ounce of prevention, as they say, is worth hundreds of pounds of cure!
When is Forex Trading Tax-free in the UK?
As we demonstrated above, forex trading in the UK is tax-exempt only under specific and limited circumstances. First, you cannot engage in forex trading with the purpose of generating an income. That is, you must qualify as a ‘speculator’ in the eyes of HMRC. Second, you should trade only in spread bets to avoid capital gains and Stamp Duty Reserve taxes.
Simply put, if you make a living trading in forex or engage in forex trading as a source of secondary income, you will owe taxes on your gains. By carefully selecting the kind of trading instrument or registering as a sole trader, however, you may be able to decrease your tax bill by offsetting losses.
What about Copytrading and Passive Investments?
The UK considers both copytrading and passive investing subject to the capital gains tax, so you’ll need to plan your investment and trading strategy accordingly if you plan to move from speculative trading to serious investing.
Team that worked on the article
Chinmay Soni
Contributor
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson
Developmental English Editor
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito
Cryptocurrency and stock expert
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).