CFD Taxes

Taxes on CFD trading in the UK can be confusing for beginners, but fail to meet your obligations or miss HMRC’s deadlines, and you could be landed with a hefty fine. In this guide to CFD taxes, we explain how capital gains and income tax rules impact British traders. We also break down useful tips for filing your tax return accurately and on time.

How are CFDs Taxed?

Profits from trading CFDs are normally classified as capital gains in the UK.

Traders are permitted up to £12,300 of tax-free capital gains per annum. Anything greater than this limit is subject to taxation. For trusts, the tax-free limit is £6,150.

Note that the capital gains tax allowance is falling to £6,000 in 2023/24 and £3,000 in 2024/25. For trusts, it is falling to £3,000 in 2023/24 and £1,500 in 2024/25.

Capital Gains Tax Explained

In the UK, capital gains refer to the increase in the value of assets between the time a person acquires and disposes of them. For example, if you bought a bottle of whisky for £200 in 2015 and sold it for £1,000 in 2022, you would have made a gain of £800, and this could be liable for capital gains tax.

The gains on some assets, including your principal home, motor cars and shares held in a private equity account, are tax-free.

Note that while Scotland has different income tax rates to the rest of the UK, its capital gains tax is calculated in the same way as its neighbours.

How to Calculate Capital Gains Tax on CFDs

To calculate the capital gains tax you owe from CFD trading, you only need to consider the profits generated, not the total revenue. For instance, if you stake £10 and you earn a return of £25, you only consider the £15 profit. Furthermore, His Majesty’s Revenue & Customs (HMRC), the UK’s tax, payments and customs authority, permits traders to use losses from the previous four years to offset any gains. For example, if you have generated £5,000 worth of profit but also made £2,000 in losses, you are only liable to pay tax on £3,000.

The tax rate you pay on your capital gains depends on your basic income tax rate. If your basic income per annum totals £50,271 or more, your capital gains tax rate is 20%. If you pay the ‘basic’ rate (income between £12,571 and £50,270), you will need to calculate the sum of your total taxable income. This is capital gains plus basic income. If this adds up to less than £50,270, you pay 10% on your capital gains. Anything greater than £50,270 is taxed at 20%.

Let’s take another example:

If in a tax year you earn a basic income of £40,000 and capital gains of £10,000, your total taxable income is £50,000. As it is below the £50,270 threshold, your capital gains are taxed at 10%. If instead, you generate capital gains of £15,000, your total taxable income is now £55,000. The first £10,270 capital gains are taxed at 10% and the other £4,730 is taxed at 20%.

Note, capital gains and income tax thresholds may vary each year.

Offsetting Taxes

In the UK, taxpayers can offset any losses they make in one investment or trading product against gains made in another. For example, if you earn £20,000 from capital gains tax on an investment, and lose £2,000 trading CFDs, you would only be liable to pay tax on £18,000. Likewise, any losses you make on other investments can be used to reduce your tax liability on CFDs.

This is one reason that it is important to always keep clear records of your losing as well as your winning trades – a trading journal is one of the best ways to do this, and it has the added advantage of helping you analyse and improve your CFD trading strategies.

How to Pay Taxes on CFD Trading

In the UK, you file your tax return annually at the end of the tax year, in April. The 2023/2024 tax year, for example, starts on April 6th, 2023 and ends on April 5th, 2024.

1. First, calculate the amount of tax that you owe, including any allowable losses
2. Report the total tax you owe using the ‘Report Capital Gains Tax online’ service provided by HMRC
3. After doing this, HMRC will send you a payment reference number via email or in the post
4. Make the payment either through the online service or via your bank. Be sure to include the payment reference number supplied by HMRC

Tips for Paying Taxes on CFDs

Keep a Record

Try to keep a record of your trades throughout the year in a journal or using software such as Microsoft Excel. Write down trade information, for example, the entry time and price, the underlying asset, the exit time and price and note the profit or loss.

Keeping track throughout the year, as you make the trades, will save time when you need to file your tax return.

Check the HMRC Website

To reduce the risk of making mistakes when filing your tax return, it is worth visiting the HMRC pages on the Gov.uk website to familiarise yourself with the rules regarding paying taxes on CFDs in the UK.

Seek Professional Help

Some traders may feel they need further advice concerning paying taxes on CFD trading and a professional tax advisor will provide this service, calculating how much tax needs to be paid.

Some advisors will also deal with HMRC directly on behalf of a client, after being given authorisation to do so.

CFDs Explained

A contract for difference – or CFD – is a high-risk, high-reward derivative where the buyer or seller pays the difference in the price of an asset between the entry and exit positions. Importantly, because it is a derivative, you never actually own the underlying asset, such as a stock. Instead, you are trading on its movement in price.

There are two types of classic CFD trades, namely a long and a short. Simply put, you buy a long CFD contract if you think that the value of the asset will increase, as you are – in effect – buying the asset now and selling it later. If you think the asset’s value will decrease, you buy a short CFD contract. A short is equivalent to selling the asset now and buying later. If your prediction is correct, the broker will pay you the difference between the buy and sell positions (minus any fees).

Importantly, CFDs offer trading on margin (a method of investing using funds provided by a third party). This can boost a trader’s purchasing power. Leverage – using borrowed funds to increase your trading position beyond what would be available from your cash balance alone – works as a multiplier to both your initial investment and your returns. But while this can lead to greater profits, it can just as easily mean significant losses.

Let’s take an example of a CFD trade:

Stock A is currently valued at £50 and you open 100 long CFD contracts. The total value of your trade is worth £5,000 (£50 X 100 contracts). With leverage of 1:5, you would only need to deposit £1,000 as your investment is multiplied by five.

After opening the contract, stock A increases in value by £5, meaning the contracts altogether are now worth £5,500 (£55 X 100). If you close your positions at this point, your total profit is £500 (broken down as £55 X 100 – £50 X 100) less any fees or commission that the broker charges.

Bottom Line on CFD Taxes in the UK

It is worth dedicating time to properly understand the rules on CFD trading taxes in the UK. It can be stressful when the April deadline to file a tax return approaches, and being prepared in advance can ease that pain. Fortunately, there are many resources online that cover taxes and CFD trading in the UK, such as the Gov.uk and Financial Conduct Authority (FCA) websites.

Note, this article is for informational purposes only and does not constitute professional tax advice. Seek the counsel of a tax professional for advice pertaining to your specific circumstances.

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