Tax & spreadbetting, for full-time, sole source of income traders

This is a discussion on Tax & spreadbetting, for full-time, sole source of income traders within the Spread Betting & CFDs forums, part of the Commercial category; http://www.trade2win.com/boards/showthread.php?t=16552 Pringle - Hi, I am a full time spread-bet trader. I have been making good money doing this for ...

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Old Jun 20, 2006, 1:33pm   #1
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Tax & spreadbetting, for full-time, sole source of income traders

Quote:
http://www.trade2win.com/boards/spread-betting-cfds/16552-anyone-here-full-time-consistent-spreadbetter.html
Pringle -
Hi,
I am a full time spread-bet trader. I have been making good money doing this for nearly four years.
I trade a £40K account split between two SB firms. I pay no tax and have a letter from the IR stating that I do not have to pay tax on my winnings even though it is my sole source of income. (I have it framed on my office wall)
I average about £3000 profit per month, although it varies a lot. I have made as much as £8K in a month but obviously I have losing months when I can lose several grand.
My preferred markets are the common currency pairs as well as commodities especially gold and silver. Trades can last anything from a few hours to many weeks.

I would say for a good trader making returns of 5 to 10% per month on your account size is quite realistic. Even so I am probably pushing my account to the limit. I need about £2500 p month to live on so I don’t really have a lot to spare. It would be more comfortable with a £50K account to trade so I could reduce my stake size sometimes, and that is my next objective.

The worst parts of the job are of course the stress when things go wrong. Having to withdraw funds from your trading account to live on when it is taking a hit is very worrying. I have had draw-downs of nearly 50% twice now and I hope never to have to experience that again although I probably will.

I do not regret leaving my day job for a second. I work from home, see lots of my wife and kids, have lots of free time and enjoy what I do.

Long may it continue!

I would be interested in hearing from any other full time spread betters out there to compare notes, stories etc.

Cheers

Pringle

Hi

I was interested to read this post a while back.

I have recently become a full-time trader and would like conclusive peace of mind that my profits are tax free.
I trade 3-5 times per day on a full-time intraday basis.

I have spoken to 4 spreadbetting companies sales departments. Two of them stated that spreadbet profits are definately free from tax, even if you trade spread-bets full-time and it is your sole source of income.
The other 2 said that there may be a government loophole stating that if spreadbetting profits are your sole source of income, and that it is something you are doing full-time, you may be liable to pay tax.

I have just spoken anonymously to a person at my local tax office, and he said that if financial spreadbetting (or even sports betting) profits are your sole source of income and it is a full-time activity, these profits must be declared to the tax man.

There does seem to be some confusion here, and the lack of a clear-cut understanding and policy on this tax issue, and how it relates to full-time traders.

If you are a full-time spread-better -

Do you trade full-time intraday - e.g. 40 hours per week?

Do you pay tax?

Has the tax-man said that you do not need to pay capital gains tax or income tax?

Have you just kept quiet and hope that the tax-man doesn't chase after you?

Do you have to declare your earnings to the taxman? if so, do they just acknowledge your declaration and betting profits and then let you off without paying capital gains tax or income tax?

If full-time spread-bet traders, whose sole source of income is spreadbetting profits are liable to pay capital gains tax or income tax, is there a way of avoiding paying tax? - e.g. doing one weeks agency temp work per year?

All feedback greatly appreciated.

Many thanks
jtrader.

Last edited by jtrader; Jun 20, 2006 at 1:40pm.
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Old Jun 20, 2006, 1:40pm   #2
 
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http://www.hmrc.gov.uk/manuals/bimmanual/BIM22017.htm

this is on the HMRC website - its the exeptions to definitions of a "trade" - this has recently been reworded and is much much clearer.

Previously it had been thought that if you were a pro gambler then you were acting with the expectation of making profit and undertaking a trade, even though gambling, and liable for tax.

This link nicely clarifies it, so anyone who is a gambler, fulltime or not, does not pay tax as they are not perofrming a trade. So as long as SB remains classified as gambling, you dont pay tax. Whether the Revenue changes SB classification in future is of course, unknown.
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Old Jun 20, 2006, 1:55pm   #3
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JTrader started this thread Thanks Arb,

that is just the sort of supporting evidence that I was after.
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Old Jun 20, 2006, 1:56pm   #4
 
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I dont think that there is any risk of the current legislation changing whilst the no of active spread betters is so small est 150 000 http://www.trade2win.com/boards/show...postcount=1601

!50 000 is not many and who knows how many of them make enough each year out of sb to even qualify for cgt
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Old Jun 20, 2006, 2:44pm   #5
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http://www.trade2win.com/boards/show...t=19559&page=5

FYI this topic has been discussed extensively on the above thread.
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Old Jun 20, 2006, 3:01pm   #6
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It would be very difficult for the IR to change the definition of spreadbetting from "gambling", given that 80-90% of spreadbetters LOSE.

There are not too many professions where 80-90% of practitioneers lose. No matter how successful an individual spreadbetter may be, placing a bet, and then taking a profit or a loss, is gambling.

I do not think the IR could change the classification of spreadbetting without having considerable tax implications for all other forms of gambling
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Old Jun 20, 2006, 3:38pm   #7
 
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Quote:
It would be very difficult for the IR to change the definition of spreadbetting from "gambling", given that 80-90% of spreadbetters LOSE.
I don't think that in itself would stop them, since the same % of daytraders lose but it doesn't stop them taxing us
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Old Jun 20, 2006, 4:25pm   #8
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If you think about it logically they don't have to change the rules .The rules are already in place to tax spreadbetters as a trading occupation. By that I mean simply this anyone who spreadbets for a fulltime occupation is unlikely to do so if they LOSE. Consequently, just as the taxman would tax a self employed joiner so too could he tax a selfemployed trader who simply happens to trade through the medium of spreadbetting as opposed to stocks ,futures etc. Be a devil to administrate ,but possible by employing criteria of sources of income etc to define who is the fulltime trader and following that simply ignoring the instrument as it were. Surprised they have not yet done it as there is clearly a push on to raise tax revenues in so many other 'loophole' areas.

Actually I could probably make a system to do that reasonably easily ...I wonder what it is worth to the IRS in consultation fees maybe I don't need to trade
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Old Jun 20, 2006, 4:28pm   #9
 
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We are talking about the British government and taxman here... If your earning over 40K PA, they will find a way....
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Old Jun 21, 2006, 9:00am   #10
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HMRC.GOV.UK information

JTrader started this thread The info on betting & gambling on the pages at the above link (from the horses mouth as it were) does seem fairly clear-cut.
Basically, a professional gamblers activities do not amount to a trade. The professional gambler may well run successful "systems" that make them profits, but because they do not "expect" to make a profit (they just happen to do so) there profits are apparently not taxable.

Quote:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM22017.htm -

BIM22015 - Trade: exceptions & alternatives: betting and gambling: introduction

The basic position is that betting and gambling, as such, do not constitute trading. Rowlatt J said in Graham v Green [1925] 9TC309:
“A bet is merely an irrational agreement that one person should pay another person on the happening of an event.”
This decision has stood the test of time. In an Australian case, Evans v FCT [1989] 20ATR922, 89ATC4540 Hill J said:
“There has been no decision of a court in Australia nor, so far as I am aware, in the United Kingdom where it has been held that a mere punter was carrying on a business.”
However, an organised activity to make profits out of the gambling public will normally amount to trading.

Although over time new forms of games of chance have evolved, these principles remain the same. 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. The bookmaker organising the spread bet is taxable on their profits.


The section on betting and gambling contains the following further guidance:
· what is a bet - BIM22016,
· the professional gambler - BIM22017,
· organised activity - BIM22018,
· element of existing trade - BIM22019,
· spread betting - BIM22020.

BIM22016 - Trade: exceptions & alternatives: betting and gambling: what is a bet?

The first, and obvious, question is simply what is a bet? A definition of a bet or ‘wager’ was given by Hawkins J in Carlill v Carbolic Smoke Ball Company [1892] 2QB484 and has been followed in later cases:
“It is not easy to define with precision what amounts to a wagering contract, nor the narrow line of demarcation which separates a wagering from an ordinary contract; but, according to my view, a wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known.”

BIM22017 - Trade: exceptions & alternatives: betting and gambling: the professional gambler

The fact that a taxpayer has a system by which they place their bets, or that they are sufficiently successful to earn a living by gambling does not make their activities a trade.

The case of Graham v Green [1925] 9TC309 concerned a man whose sole means of livelihood came from betting on horses at starting prices. Rowlatt J says at pages 313 and 314:
“Now we come to betting, pure and simple… the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money, at whatever may be the starting price. I do not think he could be said to organise his effort in the same way as a bookmaker organises his. I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays to- day and he plays to-morrow and he plays the next day and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But I do not think that you can find, in his case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man ... is that he is addicted to betting. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting. The subject is involved in great difficulty of language, which I think represents great difficulty of thought. There is no tax on a habit. I do not think "habitual'' or even "systematic'' fully describes what is essential in the phrase "`trade, adventure, profession or vocation''.’
This shows that having expertise or being systematic (‘studying form’) is not enough to create a trade of being a ‘professional gambler’.

Some ‘professional gamblers’ do carry on a trade, for example, where they receive appearance money for appearing on television programmes. They are providing a service to a customer (the television production company) for reward. Whether their gambling winnings are proceeds of that trade would depend upon the facts.

BIM22018 - Trade: exceptions & alternatives: betting and gambling: organised activity

An organised activity to make profits out of the gambling public will normally amount to trading. An example of this is the bookmaker.

In Partridge v Mallandaine [1886] 2TC179 a professional bookmaker systematically attended racecourses for the purpose of carrying on that activity; he could not legally recover amounts due to him. He was held to be carrying on a vocation and hence assessable Case II.

Rowlatt J explained the position in Graham v Green [1925] 9TC309 at page 313:
“It has been settled that a bookmaker carries on a taxable vocation. What is the bookmaker's system? He knows that there are a great many people who are willing to back horses and that they will back horses with anybody who holds himself out to give reasonable odds as a bookmaker. By calculating the odds in the case of various horses over a long period of time and quoting them so that on the whole the aggregate odds… are in his favour, he makes a profit. That seems to me to be organising an effort in the same way that a person organises an effort if he sets out to buy himself things with a view to securing a profit by the difference in what I may call their capital value in individual cases.”
Bookmakers may themselves place bets. Where this is done as part of the trade (‘laying off’), the proceeds or losses have to be taken into account in arriving at their profit.

The key feature is that the taxpayer is likely to be involved in the organisation of the activity. They are not mere punters. They are carrying on an activity where the odds are in their favour.


BIM22019 - Trade: exceptions & alternatives: betting and gambling: element of existing trade

There are exceptional circumstances where a trader may enter into a ‘bet’ in the course of trading activities. An example would be where the ‘bet’ is used to hedge the interest rate on a loan for the business.

The cases of Down v Compston [1937] 21TC60 and Burdge v Pyne [1968] 45TC320 show that to be taxable, betting wins must come from the carrying on of the trade not merely from an opportunity presented by a trade.

In Down v Compston [1937] 21TC60 a professional golfer attached to a golf club habitually engaged in private games of golf for bets of varying amounts and won substantial amounts. He was found not to be liable under Case II on the basis that the bets did not arise from the playing services and that there was no organisation to support the view that he was carrying on the business of betting on the games of golf.

In Burdge v Pyne [1968] 45TC320 the proprietor of a registered club which provided gambling facilities, including a card room, won considerable sums of money from three-card brag which he played regularly with members in the card room. He was taxable on his gambling winnings.

Pennycuick J stated at pages 323 and 324:
“…the Appellant was carrying on the business of a club; upon the club's premises he habitually played the game of three-card brag with other members of the club; and at that game he was invariably successful… Given those facts, it seems to me that the Commissioners came to the right conclusion in finding that the winnings of the Appellant from three-card brag did represent a receipt by him in carrying on the business of the club. He owned the club; he carried on this game upon the club premises as such; and, moreover, it was members of the club in whose company he played the game and from whom, it appears, he invariably won money. I see no reason to think that that particular activity on the part of a club proprietor is not an activity in the course of carrying on the business of the club, and consequently winnings from that activity fall into the receipts of the club for the purpose of ascertaining the profits of its business.
[the Appellant] contended that these winnings should be treated as the fruit of a private activity ... outside the business of the club, and accordingly should not be taken into account in computing the profits of the club.”
He went on to distinguish Graham v Green [1925] 9TC309 (see BIM22016) because:
“here there is a trade whereas there the person charged was not carrying on any trade at all”.
Of Down v Compston [1937] 21TC60 he said:
“In that case the vocation afforded in some sense the opportunity for making the bets, in that Mr. Compston would not have had companions on his rounds against whom to bet if he had not been a professional golfer, but the bets did not arise out of his vocation. Again it seems to me that that case is wholly distinguishable [because] in the present case the club was not merely the occasion that enabled the Appellant to play private games of cards. The playing of cards was part of the activities of the club, and his winnings from those cards, it seems to me, arose in the full sense out of the carrying on of the club”.
It should be noted that the findings of fact show that the taxpayer or one of his family had to be present whenever cards were played and always acted as dealer. The findings also show that the cards were an integral part of the club and the means by which it made a profit.

BIM22020 - Trade: exceptions & alternatives: betting and gambling: spread betting

The principles of Down v Compston [1937] 21TC60 and Burdge v Pyne [1968] 45TC320 (see BIM22019) apply equally here. 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.

For more on this see CFM13214.
This begs the question - with the introduction of futuresbetting.com - why don't many more UK based traders now engage in spread-betting in order to avoid paying taxes? Surely it's worth it?

jtrader.

Last edited by jtrader; Jun 21, 2006 at 1:07pm.
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Old Jun 21, 2006, 9:40am   #11
 
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This begs the question - with the introduction of futuresbetting.com - why don't many more UK based traders now engage in spread-betting in order to avoid paying taxes? Surely it's worth it?
It is a situation that I am monitoring, I have to admit, but threads like the WorldSpreads thread (and quite a few othes) do little to advance the attraction of spreadbetting, I would much prefer to pay tax than go through that grief. A read through a number of threads on the sublect may go some way to answering that question.
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Old Jun 21, 2006, 10:49am   #12
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"Basically, a professional gamblers activities do not amount to a trade. The professional gambler may well run successful "systems" that make them profits, but because they do not "expect" to make a profit (they just happen to do so) there profits are apparently not taxable."

Which actually is absolute nonsense fortunately for us they have not yet clued in to that...the usual tripe by some commissioner ,or judge who basically does not understand what he is talking about ...the prerequisite for an ongoing 'professional' gambler is that he has a positive expectancy. If he does not then he will not be able to continue to conduct the activity , very simple yes?. How many times have we said...to trade continuously you need positive expectancy. If you wish to trade (gamble) fulltime (professionally) you need positive expectancy. What is postive expectancy..LOL it is that you expect to make a profit LOL....I really can't believe they won't wake up to this at some point.
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Old Jun 21, 2006, 12:24pm   #13
 
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Quote:
"Basically, a professional gamblers activities do not amount to a trade. The professional gambler may well run successful "systems" that make them profits, but because they do not "expect" to make a profit (they just happen to do so) there profits are apparently not taxable."
Let's hope they don't study poker, they may get a different view of "expectancy"
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Old Jun 21, 2006, 12:40pm   #14
 
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Originally Posted by chump
What is postive expectancy..LOL it is that you expect to make a profit LOL....I really can't believe they won't wake up to this at some point.
I think they will let sleeping dogs lie. For the 10% or fewer they manage to extract a few beans from, there will be the other 90% who will be looking to offset their losses against tax (it would be inequitable not to). Easier and cheaper to stay with the status quo.
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Old Jun 21, 2006, 1:10pm   #15
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Follow the logic Peto. Forget what you think you know about who wins and who loses for a moment.
Does a spreadbetter conduct his activity on a fulltime self employed basis? In other words does he have any other form of job?
Does the income from same form his primary source of income ? Does he have any other sources of EARNED income?

Now most of the 90% you refer to would simply not meet the above criteria just as everytime they pick up a saw to do a bit of DIY they don't become self employed joiners do they .
This means their profits and their losses are irrelevant from a taxable point of view as they are not incurred within the scope of their business.
Now the 10% who do consistently make the money and that fall within the above remit would be able to include losses just as they could include any other expense they might incur solely relating to the course of their business.
So you see the IRS could pursue this line quite easily if they wished to amend the current view on spreadbetting activity based upon that nonsensical notion of "expect to make a profit" and they could do so in a way that falls into line with current taxation of earned income from a trade. As for "peanuts" I don't know how much money is out there being made by fulltime spreadbetters so I can't say whether it wouldbe worth the IRS's attention. They are certainly giving plenty of attention to other 'loopholes' though.
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