Claiming Losses Against Capital Gains Tax


Q.: What is the tax situation in Australia?

A: Originally when contracts for difference were first introduced to Australia, there was no tax payable on income derived from CFD trading because the activity was treated as gambling. However, this quickly changed and the ATO introduced legislation that directly targeted CFDs trading before anyone could file a tax return.

For most people CFDs are treated using the capital gains provisions. A CFD is a contract, and a contract is an asset for tax purposes, the same way a share is. In this respect, losses should be treated as capital losses and offset against any other capital gains. So in a nutshell any profit derived or loss incurred by you in respect of a CFD should be included in your assessable income or allowable as a deduction (respectively) at the time the profit or loss is 'realised' for tax purposes. Thus, the income for tax purposes is the net income calculated by summing up all your gains and taking away all your losses.

 

This is consistent with the ATO's position in relation to the taxation treatment of financial CFDs as set out in Taxation Ruling TR 2005/15 - 'Income tax - tax consequences of financial contracts for differences'. The Tax Ruling stipulates that if you are involved in a business (or entering into commercial transactions) where you buy or sell contracts for differences for the purpose of making a gain, any profits made will be considered as assessable income and any losses incurred will be an allowable deduction. The determining factor here is whether you are in fact carrying on a business (or entering into a commercial transaction) the main tests to determine this are outlined below:

  • The number of transactions you enter into each year (e.g. on a weekly or monthly basis);
  • The size and scale of your operations;
  • Whether you are carrying on your activities in a systematic, organised and businesslike manner for the purpose of profit making; and
  • The degree of skill employed in performing these activities.

If you determine that you are not carrying on a business (or entering into commercial transactions), any profit or loss you would normally make would fall under the Capital Gains Tax (CGT) provisions. As CFDs are regarded as a capital gains tax asset, any capital gains are treated as assessable income and capital losses can be deducted from any current or future capital gain. As the Australian Tax Office considers CFDs as contracts of speculation, in that you are effectively speculating that the underlying security or market will either increase or decrease in value, it would seem from the ruling that the aforementioned may not apply to CFD transactions. Should this be the case, any capital gain or capital loss you make 'from a financial Contract for Difference entered into for the purpose of recreation by gambling' will be ignored under the CGT gambling exemption provision. What this means in theory is that if you make a $1 million capital gain from a CFD trade and you can persuade the ATO the contract was entered into for the purpose of recreation by gambling, you will be laughing all the way to the bank. However, if the transaction resulted in a $1 million capital loss, you would lose the ability to offset the capital loss from any current or future capital gains that you may have. In addition, the ruling does not anticipate a 'gambling' outcome in most CFD trading activity. According to the ATO (Australian Tax Office) trading requires a high degree of skill rather than mere luck or chance and therefore is not comparable to gambling.

Realisation will generally occur at the time the CFD is closed out or otherwise expires. Note that expenses such as platform fees, financing charges and internet access, may be deductible thereby reducing your taxable income. Also, should you treat your profits from trading shares as ordinary income, which most people DON'T, then you can treat your contracts for difference trading as a business loss and offset against other ordinary income.

One point to note is that there are no franking credits in relation to CFDs and the the 12-month capital gain discount also does not apply. In any case always get in touch with a tax adviser in relation to such matters as your specific situation may be unique and not covered by the above guidelines.

Note: In Australia if you happen to make in excess of 6K you pay 15%, in excess of 34K and it gets better at 30% plus. If you are planning on making a huge amount (don't we all) then exploring your nations loop holes and company setups may be a viable option. For example, again in Australia. You can set up a company in the form of a trust, where you make enough per trust beneficiary (normally relatives and siblings up to $6000) which is tax exempt. If it worries you that much, get some tax, legal and account advice on ways to minimise your expose to higher taxes. It may be the best couple of hundred dollars you can spend, and if your set up as a company usually they can be written off as a deduction (expenses). Like I say, best to speak to a qualified party in regards to these issues however...

Q.: Is it the trading date or the settlement date that is used for the financial year come tax time?

A: It's the trading date. If you dispose of a CGT asset to someone else, the CGT event happens when you enter into the contract for disposal. [Australia]

Q.: Any tax advice for someone located in the United Kingdom looking to deal in USA shares?

A: For one be sure to bookkeep a record of all your trades in a spreadsheet or accounting software and start to understand how capital gains tax applies to you. In the United Kingdom there is a £9,000 personal capital gains allowance so you might never get to the position where you have to pay taxes but then when you reach a certain amount in transactions (I believe something like 3 times the annual allowance) you still have to provide the transaction records, regardless of any gains or losses so it makes sense to keep records. This applies for overseas shares as well where any capital gains tax due is calculated by using the equivalent of the currency of any transaction you make. There are also some other quirky rules to capital gains tax which you may benefit from researching; don't be scared off, just remember to keep records of all your transactions. If you make lots of money the tax man will inevitably want his due.

If you were to start transacting in USA shares, you would at some point need to fill out a W8N form to declare any dividend income as non-taxable in the United States, change the currency using whatever rate you can get (usually about 1% difference from the real foreign exchange rate), pay a commission for the purchase of any shares (usually about $5-$15), pay a commission for the sale of any shares (another $5-$15), then to withdraw it in GBP you will lose another 1% on the forex rate commissions.

Q.: If shares are traded within SS ISA regardless of how many times you buy and sell or whether you realise a capital gain or not, you do not need to report back to the HMRC right?

A: Yes, that's right - if you're dealing within a stocks and shares ISA you do not need to file reports.

Q.: Is there a problem selling shares that are showing a loss and buying them back same day to reduce capital gain this financial year?

A: If you do this in Australia there can be problems. 'I want to remind anyone who may be considering using wash sale arrangements to reduce their next tax bill that significant penalties can apply.' [http://www.ato.gov.au/corporate/content.asp?doc=/content/00110544.htm]

Q.: What happens tax wise if a person bought 1000 shares some years ago and then purchased and sold a further 500 within 4 weeks for a profit?


Would I be correct in thinking that if a person purchased shares a number of years ago, say 1000 (which are currently worth less than initially purchased),then purchased a further 500 shares in the same company and sold 500 shares within 4 weeks for a profit, then CGT would be due on the profit?

A: Yes, if the shares are of the same class, the 4 week rule would identify the shares sold as being the ones you had bought within the four weeks. If you wait 30 days and sell the 500 you would have a CGT loss instead. The legislation also says that this operates in the case of a married couple where one partner buys shares, and the other sells identical shares within the 4 weeks. Normally you do not have to send in documentation regarding sale of shares when completing a return; I would just keep copies of everything in case a query arises. And seeing how far back recent investigations have gone, keep for life.

Q.: Is CGT and stamp duty taxed differently if shares sold within a short period of 10 days?

A: There is a CGT restriction when shares are bought and sold within 4 weeks, that over-rides the FIFO rule. Also, if you sell at a loss, and buy back within 4 weeks, that loss may only be used when those particular shares are disposed of I do not know of any Stamp duty peculiarities in quick sales.

Q.: Can I transfer my UK shares to an overseas broker and so then claim they were overseas shares in the process?


I currently own UK shares originally dealt via a UK broker. If I were to transfer the shares to an offshore broker could I claim that they were then overseas shares? If this is the case as I'm a non UK domicile could I then keep the dividends out of the UK and avoid income tax?

A: I'm afraid this is not possible as the shares are located where they are originally dealt (if quoted) or where the company is registered (if unquoted). So the location of the broker doesn't really make a difference and if they are UK shares the dividends would be taxed as they arise.

Q.: Can I file a claim to the tax authorities against CFD losses incurred in my trading?


Hi, I guess there must be a lot of people in the same position as me so any feedback would be good. That is, I work in a regular job and it's tax return time. In my first year of CFD trading I have had a loss. I should be able to offset that loss on my income from the job and receive a substantial tax return. However it is not easy to find a tax consultant who understands the principals of CFD trading or get any help from anyone at the ATO.

One thing's for sure If I'd made a profit the ATO would want tax paid, so I feel I must be able to claim the loss. The tax consultant I'm using wants to know what was my total purchases and total sales, which is nearly impossible to tally as it includes 1000's of index trades.

I have told him what I put in my account and what is left, and the balance is the loss. I have all the trades of course from CMC statements but it doesn't give totals only a running balance.

Any feed back?

A: Suppose you were registered with the tax authorities as a trader. You can claim books, courses etc as an expense. However, losses can only be claimed against profits made in trading. My Tax Accountant noted my initial losses until I made profits to claim against.

I have always had an accountant do my tax returns. As you mentioned CFD trading seems to be a bit of a curve ball to accountants so don't be afraid to turn them over until you find a good, honest one that can keep you in the good books with the tax office. Better to be cautious when it comes to the tax man IMHO!

Take this example; Kamikaze pilots cannot claim a loss for tax – unless, inter alia, they have a (preferably documented) intention to make a (tax-assessable profit) at the outset – i.e. they are in a profit making business and not a hobby or gratuitous venture – unless, of course, registered as a charity.

Claiming a loss against other income is also subject to rules that, if not met, means the loss would need to be carried forward until income from the business is sufficient to absorb the carry-forward loss or the conditions/rules are met in a subsequent year. A sole trader kamikaze pilot has a problem but if the business was carried out as a company there are possibilities.

An aside: Even where an occupation as a kamikaze pilot is considered illegal or not, gains from earning assessable income from it would normally be taxable – in the eyes of tax law, and therefore related expenditure (depreciation and write-off of planes, fuel, union fees, etc) would be deductible if the business conditions are met.

There are many scenarios where a kamikaze pilot or CFD trader can demonstrate they are eligible to claim a loss, but the advice you already have is also relevant: including activity volume, detailed records of losses – and profits. At a stretch your CMC statements can suffice for detail but you would need to show that you were running your trading in a business setting.

Would you buy and sell product in a widget trading business without knowing what stock you had on hand to service customers? Looking at your bank (or CMC statement) balance alone means you would soon be out of business.

In the past I have emailed CMC for a financial year account when preparing paperwork for my return. Even getting simple financial facts from CMC reports are difficult. I do not know what other CFD providers offer their clients regarding suitable reports for Tax Office purposes, but it could be a major selling point for a provider if they could provide Financial Year Reports that provide key data the Tax Office requires.

Seek and listen to good tax advice...avoid disappointment.

Q.: When paying capital gains tax on shares what expenses can you claim against it?


Broker fees? Stamp Duty on the purchase? Is it correct that CGT losses can be carried forward indefinitely to offset gains? What sort of tax percentage can you get down to trading futures after paying minimal commission and performing some accounting, eh, optimisation?

A: Yes, I believe that you (at least in the UK/Ireland) can claim broker fees and stamp duty as expenses in CGT computation, and carry forward losses indefinitely. The way it works with CFDs, if you have a CGT loss and this is not completely offset during the tax year, you can use this loss against gains in future years until it is used up! You must however inform the tax office or you will lose the right. Send 2 copies of the details of the loss to HMRC and ask them to acknowledge date stamp and return one of the copies. Keeping the other for your records. There is no time limit as to how long the loss can be held over to use against future gains!

In any case talk to an accountant - commissions, withdrawal fees, broadband fees, housing, etc. could all be tax deductible depending on how you play it, you could also set up your own business and take a salary only paying income on that and corporation capital gains on the rest, etc...

Q.: If I lost money in the stock market last year and had no other job do I need to file a tax return?

A: If I were you I would file my taxes this year to register the stock market losses you incurred. If you report realised losses you can then carry them over to following years and thus be able to write off any potential gains during a future year. For instance, if you lost $50,000 in 2009, but gained $50,000 in 2010, you could use the 2009 losses to wash your gains (i.e. offset gains) and thus be able to avoid all taxes for 2010.

Q.: I have been trading in a CFD account and incurred losses in 2007 and 2008 but am in profits this year. Can I deduct my losses from 2007 and 2008 from my 2009 profits and pay tax only on the difference?

A: The following answer assumes that you are taxed as a CFD investor as opposed to trading in CFDs. On this understanding you would stand to be charged capital gains tax on any gains that are realised. If you suffer losses on your CFD trading activities, then these can be offset against any other capital gains on the same year and can then be carried forward to cancel out capital gains liability in future years.

However, do keep in mind that losses can't be carried back and that any brought forward losses are offset against capital gains so as not to waste the CGT annual exemption. So yes in your case the 2007 losses are tax deductible against 2008 gains. However, the losses will reduce the gain only to this amount (the rest of the gain will then be offset by the annual exemption). Any excess losses are again carried forward until they are utilised. The usual claim time limit apply and losses will need to be claimed within 5 years after the 31 January next following the end of the tax year in which the loss accrued.

Q.: If you pay CGT on profit from shares in 2007 and then make a loss in 2009, can you offset the loss and get some of the CGT paid back?

A: Simple answer is no. You cannot carry gains forward, only losses. Unless you die, in which case losses can be carried back three years. Taxwise, death can be quite beneficial.

Q.: I have recently been dealing frequently in CFDs. Applying share-matching rules would be very complicated...


I have recently been dealing frequently in CFDs. I have multiple trades in the CFDs of several companies, with in some cases more than 30 trades annually. Applying share-matching rules would be very complicated. Nearly all of the trades, approximately 180, would be involved, and it would seem to be impossible for me to apply the rules personally.

A: There seem to be two different views about calculating capital gains for CFDs. The first is that CFDs are a fungible asset and should be treated as such by applying share-matching rules. The second view is that you can take all of the debits and credits and net them off to arrive at a net annual debit and net annual credit and hence derive a net capital gain. Which should apply?

The special identification rules (i.e. the share-matching rules) apply to fungible assets.

A fungible asset is an asset that grows or diminishes as parts are acquired or disposed of, but the individual parts cannot be identified separately. This applies to shares/securities as well as to commodity and financial futures, quoted options, forex and various other assets (e.g. goodwill).

CFDs are treated as fungible assets.

You are correct that all debits and credits to the account, including commission and sums equivalent to interest and dividends, are brought within the computation of the capital gain or loss when each contract is closed out.

You would, as you state, hold these within a pool for CGT purposes.

[credit to Lee Hadnum, Chartered Accountant and Chartered Tax Adviser].

Q.: I'm in the UK and bought most of my shares in 1997, therefore is my CGT allowance shared out between 1997 - 2010...


I bought the vast majority of my DGO shares in 1997, therefore is my CGT allowance shared out between 1997 - 2010 on selling, or if I were to sell in 2010, the profit is taxable only 2010's allowance. Incidentally my shares are not in an ISA, is it easy to carry out and inexpensive?

A: I'm no expert but I believe the CGT works as follow. You have an annual CGT tax allowance which for 2008-09 was £9600 and for 2010 I think is £10200. Basically this means the first £10200 you make in profit this tax year is not taxable. Any profit above £10200 is taxable at 18%.

The tricky bit is working out your profit and I have just done some research and believe that a number of rules apply relating to when you purchased your shares. For example: if I bought 1000 DGO shares today and sold them within a month then this falls within the 30 day rule.

However if you have accumulated DGO shares over a number of years which I have done then there is something called Holding 104, which means you have to average out the cost of all of your share purchases. So if you had purchased 1000 at £1 and another 1000 at £2 then you now have 2000 shares at a value of £1.5 per share. So if I now sell 800 of my 2000 shares I use the cost price of £1.5.

But just to clarify, if you sell all this year then you only get this year's allowance relief knocked off, and pay CGT on the rest. You don't get to use up past unused allowances. And remember no sale, no capital gains tax. Many do not realise this, but that was one of Warren's biggest light bulb moments.

Under UK tax rules, if you can, it is best to make at least CGT limit of £10,100 by selling some shares. If you find you have too much cash buy different shares or wait a month and buy back same company. Then there will be less CGT to pay when you do sell. That way you can earn up to personal income tax allowance in pay, interest and dividends + £10,100 Capital Gains without paying any tax (though you cannot avoid VAT unless you spend nothing!). If you are fortunate enough to pay higher rate tax concentrate on Capital Gains not dividends...etc. as tax rate of 18% much lower than income tax of 40%. If you intend to pass on wealth through inheritance then above threshold 40% goes in tax and you need not worry about Capital Gains Tax. Of course if you like to support government spending ignore this advice.

P.S. There is a great website (www.cgtcalculator.com) that allows you to enter all your purchases and sells over a number of years and works out the capital gain or loss from each sell.

Q.: Regarding offsetting share losses.. If you have sell shares from company A at a profit and a few months later buy and sell shares from company B at a loss, can you offset the loss from company B against profits made from company A?

A: If you have sell shares from company A at a profit and a few months later buy and sell shares from company B at a loss, can you offset the loss from company B against profits made from company A? If not, can you offset losses from company b against profits made on company c a few months further on?

If your loss and gain arise in the same tax period you can offset. If the loss is not fully used up, it can be carried forward indefinitely for use against gains in future tax periods.


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