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Tax Loss Harvesting

Tax Losses on CFD Trading
Written by Andy

Are CFD profits taxable in UK? How much is capital gains tax on CFD? Gains on CFD trading are taxable at the normal tax rates applicable to capital gains taxes in your country. However this also works in reverse and if you sell a contract for difference investment at a loss, the tax authority will allow you to use that loss to offset gains and income.

Exploiting these rules is a strategy commonly referred to as tax-loss harvesting, and you have until the end of the year to do it if you want to lower your 2022 tax bill. Of course you shouldn’t wait until the end of the year; it is best to be proactive because you don’t know when those losses are going to be beneficial.

To understand the strategy of tax-loss harvesting you need to be familiar with the rules applicable to capital gains tax in your jurisdiction which is why we generally advise you to consult with a local tax advisor in your country. When you sell an investment you hold with a CFD provider or brokerage for a profit, you realize a capital gain.

USA Tax Situation

In the USA while profits from investments you’ve held for a year (or less) are taxed at your ordinary income rate, those you’ve held for longer are taxed at the long-term capital gains tax rate which can range from 0% to 23.8% depending on your income. If you sell an investment at a loss, you can utilise the loss to offset any gain you might otherwise owe tax on. You should start by utilising short-term losses to offset short-term gains and long-term losses to offset long-term gains. If after doing this your losses still exceed your gains, you can utilise up to $3000 of your net loss to negate ordinary taxable income. Any additional losses over this amount can be rolled over into the following tax year.

Suppose you started the year with a $25,000 investment that has since declined to $22,000. At the end of the year you could think you could sell the investment to realise the capital loss and re-buy it immediately to remain in the position. But the IRS won’t allow you do that exactly. There is a ‘wash-sale’ rule that stipulates that you have to wait 30 days before re-buying whatever you sold. Having said if you do have a share or fund which you no longer have faith in over the long term, you could also use this opportunity to realise the loss and put the money into something you have more faith in.

UK Tax Situation Relevant to CFD Trading

Do I have to pay tax on my CFD profits?

CFD trading is not tax free in the UK unlike spread betting so you will have to pay taxes on profits. Profits are normally treated as capital gains and thereby treated separately from basic income with different tax rates.

What Are The Capital Gains Tax Rates For CFD Trading?

In the UK we have something called a Personal Allowance. This is the amount of money you’re permitted to earn each tax year before you have to start paying Income Tax. For the 2022/23 tax year, the Personal Allowance is £12,570. If you earn less than this, you usually won’t have to pay any income tax. This may be different in your country particularly the amount of the yearly allowance so best to check with a tax advisor.

Can I deduct CFD trading losses on my tax return?

In the UK HMRC state that if you incur a loss from trading over the last 4 years, it can be used as a tax deduction in the present year. Such losses can be utilised to reduce total taxable profits for the year.

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Andy

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