Stock Trading and Tax

[Soes Bandit]

Hi Everyone!

I hope you are all well.

I am basically struggling to find any information out regarding the taxation side of trading and was hoping if anyone could enlighten me. I've searched the forum as well as Google and there doesn't seem to be a great deal about this out there. Any help with this would genuinely be appreciated!

From what I can gather with electronic stock trading, there are three different taxes – Income Tax, Stamp Duty and Capital Gains Tax.

Presumably Income Tax is charged at the usual rates? I.e. Tax free up to £10,600, Basic rate of 20%, Higher rate of 40% and so on.

Stamp Duty is paid automatically on the purchase of stocks at 0.5%. From what I have ready if you are from the UK and purchase US stocks, Stamp Duty is not applicable?

Capital Gains Tax has a tax free allowance of up to £11,100. If you pay basic rate income tax then this is between 18-28%, higher rate income tax is 28% on gains.

Is it true that trading Forex is tax free?

This seems like an awful lot of tax and it makes me wonder whether as a beginner, it’s going to be a struggle to make a profit. Is income tax taken and then CGT afterwards?

Many thanks for your help

 

[Lightning McQueen]

seems a good thread http://www.trade2win.com/boards/forex/95744-uk-tax-laws-forex.html

 

[Izzy Fuente]

Hi Everyone!

I hope you are all well.

I am basically struggling to find any information out regarding the taxation side of trading and was hoping if anyone could enlighten me. I've searched the forum as well as Google and there doesn't seem to be a great deal about this out there. Any help with this would genuinely be appreciated!

From what I can gather with electronic stock trading, there are three different taxes – Income Tax, Stamp Duty and Capital Gains Tax.

Presumably Income Tax is charged at the usual rates? I.e. Tax free up to £10,600, Basic rate of 20%, Higher rate of 40% and so on.

Stamp Duty is paid automatically on the purchase of stocks at 0.5%. From what I have ready if you are from the UK and purchase US stocks, Stamp Duty is not applicable?

Capital Gains Tax has a tax free allowance of up to £11,100. If you pay basic rate income tax then this is between 18-28%, higher rate income tax is 28% on gains.

Is it true that trading Forex is tax free?

This seems like an awful lot of tax and it makes me wonder whether as a beginner, it’s going to be a struggle to make a profit. Is income tax taken and then CGT afterwards?

Many thanks for your help

Are you planning on trading as a business? If you are it would make a lot of sense to take the same approach you would for any business and get a tax accountant engaged. But as it sounds like you're just testing the water and haven't actually started trading yet. You'll find that having to consider the tax implications of your trading are going to be secondary to actually making any profits directly from trading. And as for making a profit after taxes, they can only tax you on your profits. I can't help with the specifics as each tax jurisdiction is different, but starting off, I'd just concentrate on getting to profits - then start working on how to keep them.

 

[timsk]

. . . This seems like an awful lot of tax and it makes me wonder whether as a beginner, it’s going to be a struggle to make a profit. Is income tax taken and then CGT afterwards?

Hi Soes Bandit,
As Izzy rightly says, tax really is the least of your worries. When it comes to trading, your first priority is to develop a consistently profitable methodology. Worrying about paying tax on your profits (if you make any) comes a distant second.

Of the three types of tax you mention, you only pay stamp duty if you're trading U.K. equities. This means buying and selling actual shares, as opposed to trading a derivative product such as Contracts for Difference (CFDs) - on which no stamp duty is payable. You don't pay stamp duty in any other market. Of the remaining two - income tax and capital gains tax - you may have to pay one or the other - but not both. For example, if you trade equities, you'll pay capital gains tax only. If you trade via a spread betting broker then you pay no tax of any kind regardless of the markets and instruments you trade. This is because it's classed as gambling and the brokers themselves pay tax to HMRC - much like Corals, William Hill & Co do. That said, there are some T2W members who will tell you otherwise but, thus far at least, they haven't produced a shred of evidence to support their claims. I don't know about forex, but I wouldn't have thought it wouldn't be any different to other markets and instruments. If you're at all concerned about any of this, just phone up your local branch of HMRC and ask them!
Tim.

 

[Soes Bandit]

seems a good thread http://www.trade2win.com/boards/forex/95744-uk-tax-laws-forex.html

Thanks Lightning McQueen. I did search for keywords but nothing seemed to come up when I did it..

I've had a read through and there are some interesting bits in there.

Thank you!

 

[Soes Bandit]

Are you planning on trading as a business? If you are it would make a lot of sense to take the same approach you would for any business and get a tax accountant engaged. But as it sounds like you're just testing the water and haven't actually started trading yet. You'll find that having to consider the tax implications of your trading are going to be secondary to actually making any profits directly from trading. And as for making a profit after taxes, they can only tax you on your profits. I can't help with the specifics as each tax jurisdiction is different, but starting off, I'd just concentrate on getting to profits - then start working on how to keep them.

Hi Izzy,

Yes my plan is eventually go as a full time trader declaring myself as self employed, if it works out!

I fully understand that I need to become profitable at first, otherwise there would be nothing to tax This is my main concern But as I am slightly OCD, I do like to know about these things. I also heard that many accountants do not know the specifics for stock trading, so it's just something that I would like to get an idea about

Thank you for your help.

 

[Soes Bandit]

Hi Soes Bandit,
As Izzy rightly says, tax really is the least of your worries. When it comes to trading, your first priority is to develop a consistently profitable methodology. Worrying about paying tax on your profits (if you make any) comes a distant second.

Of the three types of tax you mention, you only pay stamp duty if you're trading U.K. equities. This means buying and selling actual shares, as opposed to trading a derivative product such as Contracts for Difference (CFDs) - on which no stamp duty is payable. You don't pay stamp duty in any other market. Of the remaining two - income tax and capital gains tax - you may have to pay one or the other - but not both. For example, if you trade equities, you'll pay capital gains tax only. If you trade via a spread betting broker then you pay no tax of any kind regardless of the markets and instruments you trade. This is because it's classed as gambling and the brokers themselves pay tax to HMRC - much like Corals, William Hill & Co do. That said, there are some T2W members who will tell you otherwise but, thus far at least, they haven't produced a shred of evidence to support their claims. I don't know about forex, but I wouldn't have thought it wouldn't be any different to other markets and instruments. If you're at all concerned about any of this, just phone up your local branch of HMRC and ask them!
Tim.

Hi Tim,

I totally agree with you, Izzy is correct in what she says, but as I mention above, this is just something that I would like to know out of interest. No one ever seems to talk about the tax side and it's a big hole in my knowledge!

Thanks for the info.. very interesting. So trading US stocks, I would not need to worry about Stamp Duty.

I would be trading stocks only, for the first couple of years. So I understand that I would be paying CGT only... On the HMRC website, I though that I read you pay both? Hmm. Would this change if it was my main source of income? This is my final goal, to become a self employed trader.

Does anyone know if there is a downside to not paying Income Tax? Would you be penalised in some way for this? I understand that I would have to make National Insurance contributions for a state pension and so on. Sorry about all the questions - i'm just trying to get all this clear in my head.

Many thanks
Jonny

 

[Izzy Fuente]

I see you are a resident of UK and I had a quick look at your options. I'd still strongly recommend paying for an hour of a tax accountant's time. Ahead of that, and hopefully with someone more knowledgeable on this site to comment on what I'm about to say, but from what I can see you could cut yourself a good deal by starting a limited company and registering the business for the purpose of speculative appreciation through trading the financial markets.Your largely inevitable early losses will be tax deductible which stings a lot less than losing from your net income. If you eventually become profitable, you would have reduced your losses by your marginal tax rate. If you never achieve profitability you have only lost the untaxed portion of your capital loss. You also can pay yourself dividends which attract a lower rate than full tax and you can claim expenses. It looks like CGT will not be applicable, just corporation tax (lower than personal) and income tax on the residual amount you declare as personal income. There are national insurance costs and company filing and administration costs, but as far as my basic research has shown, these are marginal. Surely not? This looks a little too good to be true so it probably is and I hope someone can let you know where I've gone wrong in my calculations.

 

[malaguti]

if you initially start a company, then you will not be eligible for CGT allowance which you would have been had you not set up a company so you could have saved yourself £11k. Only should you exceed that 11k should you think about setting up a company which is quite easy to do but filing accounts will probably be the most expense as you will need an accountant to file them or at least sign them off regardless of if they are unaudited per companies act 2006.
I had this chat with my accountant some time ago, and he said the same thing above. why go through your company unless you are earning over the CGT personal allowance threshold each year
dividends as Izzy says is all subject to having the income to pay the dividend so your first thought should be exactly how much will you earn..then earn it..then think about a ltd company

hope this helps

 

[Izzy Fuente]

malaguti seems to have simplified the decision to the absolute basics: if you make more than this, then this, else this. Thank you malaguti. Saved Soes Bandit $1,000 on accountants fees. He's already ahead of the game.

 

[f2calv]

Having recently made the transition to full-time trading, I will share what I've had to piece together over the past year which is basically a confirmation of what @malaguti has said.

In theory if you were to purely spreadbet for a living, being that spreadbetting is classed as gambling and to be getting 100% of your earnings from gambling would then make you a "professional gambler" and thereby that income would be taxable. Obviously that assumes that HMRC could and would find out about you and would then want to try and prosecute you, but lets not start that topic again here please! But even assuming HMRC would never find you, good luck getting a mortgage or making pension contributions when your main source of income is via "under the hmrc radar" spreadbetting.

So taking the above into account...

Each year in April, at the beginning of the UK tax year, I would fund and trade a CFD account until I have traded up to the ~£11k yearly personal allowance free of Capital Gains Tax (CGT).

Having spoken to an accountant a earlier this year basically he said if you're earning more than £25k/year then a Ltd company is more tax efficient. So for the remainder of the year I plan to trade within a corporate CFD account funded via my Ltd company.

year #1 - I will pay myself 50% of profits via a PAYE salary and the other 50% my own company will contribute into my SIPP which counts as a company expense, therefore no Corporation Tax to pay. The contribution to my SIPP can then also be traded-up with CFDs
year #2 & onwards - I will pay myself the bare minimum wage to still appear on the NI radar, and the remainder of earnings I will take as dividends.
etc

Then now that I have a fully accountable income, if I choose to place a spreadbet here or there, then I can do so freely and not worry about a HMRC audit.

Obviously everyone's finances/goals are different and a validated and disciplined trading plan should be all traders first port of call.

 

[Soes Bandit]

I see you are a resident of UK and I had a quick look at your options. I'd still strongly recommend paying for an hour of a tax accountant's time. Ahead of that, and hopefully with someone more knowledgeable on this site to comment on what I'm about to say, but from what I can see you could cut yourself a good deal by starting a limited company and registering the business for the purpose of speculative appreciation through trading the financial markets.Your largely inevitable early losses will be tax deductible which stings a lot less than losing from your net income. If you eventually become profitable, you would have reduced your losses by your marginal tax rate. If you never achieve profitability you have only lost the untaxed portion of your capital loss. You also can pay yourself dividends which attract a lower rate than full tax and you can claim expenses. It looks like CGT will not be applicable, just corporation tax (lower than personal) and income tax on the residual amount you declare as personal income. There are national insurance costs and company filing and administration costs, but as far as my basic research has shown, these are marginal. Surely not? This looks a little too good to be true so it probably is and I hope someone can let you know where I've gone wrong in my calculations.

Hi Izzy,

To be honest, most have that has gone over my head but it does give me something to look into.

We have a family friend who is an accountant, so I'll be taking your advise and having a chat with him.

Thanks for taking the time to look at it

Cheers

 

[Soes Bandit]

Having recently made the transition to full-time trading, I will share what I've had to piece together over the past year which is basically a confirmation of what @malaguti has said.

In theory if you were to purely spreadbet for a living, being that spreadbetting is classed as gambling and to be getting 100% of your earnings from gambling would then make you a "professional gambler" and thereby that income would be taxable. Obviously that assumes that HMRC could and would find out about you and would then want to try and prosecute you, but lets not start that topic again here please! But even assuming HMRC would never find you, good luck getting a mortgage or making pension contributions when your main source of income is via "under the hmrc radar" spreadbetting.

So taking the above into account...

Each year in April, at the beginning of the UK tax year, I would fund and trade a CFD account until I have traded up to the ~£11k yearly personal allowance free of Capital Gains Tax (CGT).

Having spoken to an accountant a earlier this year basically he said if you're earning more than £25k/year then a Ltd company is more tax efficient. So for the remainder of the year I plan to trade within a corporate CFD account funded via my Ltd company.

year #1 - I will pay myself 50% of profits via a PAYE salary and the other 50% my own company will contribute into my SIPP which counts as a company expense, therefore no Corporation Tax to pay. The contribution to my SIPP can then also be traded-up with CFDs
year #2 & onwards - I will pay myself the bare minimum wage to still appear on the NI radar, and the remainder of earnings I will take as dividends.
etc

Then now that I have a fully accountable income, if I choose to place a spreadbet here or there, then I can do so freely and not worry about a HMRC audit.

Obviously everyone's finances/goals are different and a validated and disciplined trading plan should be all traders first port of call.

Hi f2calv,

Alot of what you and the others went over my head at first, but after reading a few times and some trusty googling, it's becoming clearer . I've always been a salaried employee, so I've no idea with this stuff

Thank you for taking the time to respond. This lot was very helpful and definitely gives me something to go from!

Thanks guys.

 

[hegilento]

Hey!
I’m a UK resident and working full time , i earn 16000£ pa . Unfortunately i couldn’t find any related case so I’m seeking advice . i would like to trade Options, Stocks, and Shares with an US based broker . My investment would not be more than 5000£, and being realistic I’m expecting 0-500£ profit annually, is this amount would be subject of Capital Gain Tax ? Is it part of the yearly exemption (2015/16 - £11,100) where income and gains up to these limits are not subject to UK tax.
Today George Osborn presented the 2 016 budget and the first 1000 pounds on investment is tax free. – even if it foreign income ?

 

[malaguti]

Hey!
I’m a UK resident and working full time , i earn 16000£ pa . Unfortunately i couldn’t find any related case so I’m seeking advice . i would like to trade Options, Stocks, and Shares with an US based broker . My investment would not be more than 5000£, and being realistic I’m expecting 0-500£ profit annually, is this amount would be subject of Capital Gain Tax ? Is it part of the yearly exemption (2015/16 - £11,100) where income and gains up to these limits are not subject to UK tax.
Today George Osborn presented the 2 016 budget and the first 1000 pounds on investment is tax free. – even if it foreign income ?

if you're UK resident you come under UK tax. £500 annually would not take you over the exemption so you would not pay capital gains

 

[hegilento]

if you're UK resident you come under UK tax. £500 annually would not take you over the exemption so you would not pay capital gains

thank u for the quick respond malaguti

 

[GotherL]

I live in Canada and I've never heard the term "Stamp Duty" before. Must be a UK thing.