CFDs: Tax Implications
There is much said about the efficiency of Contracts for Difference from a cost and charges point of view. The most obvious saving is in the leverage you have to control a set amount of shares or securities, and there are incidental savings like the saving in stamp duty in the UK, as no shares actually change ownership. Although you should always check on your personal situation with your accountant or tax office to make sure, here are the general rules about the tax implications of trading with CFDs.
Tax Situation in Australia
First, your gains on CFD transactions may be regarded as regular income or as capital gains. In Australia, these are known as ‘revenue’ and ‘capital’ accounts. Obviously, the tax you pay will depend on this decision, and you will want to steer this judgment in the most favourable direction to the extent that you are able.
If all your income is from trading, then it is likely that it will be taxed as income rather than capital gains. If your trading income is minor, then profits from CFD trades are taken as capital gains. This has not always been the official position in Australia, but in practice is how it is worked. When trading is counted as capital gains or losses, it can work to your advantage – other capital losses can be offset against these gains, or if you lose on your trading that loss can help offset other gains, such as from selling shares. This is the simplest position.
Sometimes you want to realize the capital gains from shares that have increased in value to use up allowances, or you want to sell the shares to register a capital loss, but you want to keep a position in them as you feel there are more gains to come. The rules called ‘Bed and Breakfasting’ do not permit you to do this if you sell and buy again within 30 days. The Inland Revenue deem that for tax purposes the shares were not sold.
You can get around this by using Contracts for Difference, selling the shares and taking an equal position with CFDs for 31 days. This means that you lock in the gains (or losses) that the shares experience during the month. Then you can simply sell the CFDs and repurchase the shares, avoiding the Bed and Breakfast limitations but not losing any gains in the month when you did not own the actual shares.
Sometimes it can help you to have ‘revenue’ losses rather than capital losses. The best plan is to avoid losses altogether, but if your losses go to the revenue account then they can be used to offset other income, including your salary; capital losses can only offset capital gains.
When you receive dividends from holding CFDs, rather than from holding the shares, they are usually not taxable as dividends, but as regular income, and will be taxed at your marginal tax rate. There are many things to consider in achieving an optimal tax position, and you can see that the situation can be complex, so you should take professional advice if have any doubts.
Tax Situation in the United Kingdom
In the last budget the government raised capital gains tax (CGT) from 18 to 28 per cent with the annual exemption limit of £10,100 for all investors to remain. Again, if you are a UK resident and trade CFDs you have to keep in mind that any net realised gains will be subject to capital gains tax (CGT) if the total profits exceeds your annual exemption allowance of £10,100. In practice this means that you need to keep a record of your trade transactions so as to be able to make the calculations at the end of the tax year.
Financial advisers stated the increase in capital gains tax made it even more important for investors and traders to act tax-efficiently. Transferring an asset from a higher earning spouse to the lower earner before selling it is expected to become a popular strategy with investors, some have predicted.