Yes, forex traders in the UK pay taxes on their profits, however, exemptions exist. Tax liability mainly depends on trading instruments, trader classification, style, and intention of the trader. As with any other type of trade, the HMRC requires taxes for traders earning above a specific amount.
It’s important for traders to understand their tax obligations. Whether you are a casual speculator or a professional trader, this blog will help you to figure out how regulations can affect your trading activities. We have also covered the various tax laws, whether you qualify to pay taxes and how you can become compliant.
What Does the HMRC Consider for Forex Trading Taxation?
The factors that HMRC considers when calculating the taxes liability for FOREX trading taxation are listed below:
Trading Instruments: Spread Betting and Contract for Differences (CFDs) are the two main types of forex trading and are taxed differently.
Trader Classification: Traders can be classified as speculators, self-employed or private traders. Each category follows a different tax obligation.
Duration of the Trade: Time difference between opening and closing positions of trades.
Frequency of Your Trades. HMRC may also consider how often trades are placed.
How Forex Trading Taxation Works in the UK?
Accounting for forex trading profits may appear complex for traders as taxes may not be a focal consideration when investing. The matter is especially true for amateur traders.
Tax obligations apply to specific situations; thus, knowledge in this segment can help traders tailor their activities to satisfy these obligations easily.
Trader Classification
Obscurity in tax liability arises because trading activities are personalised, and there’s no blanket way to ascertain individual profiles. However, the HMRC has categorised traders into three broad categories as described below:
Speculative Traders
Forex traders who fall into this category are exempt from paying income, capital gains, and corporation tax. Earnings up to £1000 are tax-free, and beyond are taxed. The HMRC considers this form as speculative, akin to gambling. It, however, may look into other considerations when determining whether forex traders qualify as speculative forex traders.
Self-Employed Traders
Professional self-employed traders have forex trading or related activities as their principal source of income. Forex traders pay tax on all profits over the tax-free personal allowance. Depending on an individual profile, trades can be subject to income or capital gains tax.
Private Investors
The HMRC requires private investors to pay capital gains tax. If a private investor holds any asset for less than 12 months, then he or she is exempted from the CGT; however, on the other hand, if he owns the asset for more than 12 months and sold it at profit, he or she would be liable for CGT.
Types of Taxes Applicable for Forex Trading in UK
There are three main types of taxes applicable for forex trading. What HMRC gets eventually depends on your income, trade volume, and trading instruments.
Income Tax - Private investors pay income tax on their earnings. Traders enjoy up to £1,000 of profits tax-free if following forex trading as a secondary source of income. Higher profits, however, attract taxes depending on income tax brackets.
Income up to £50,270 attracts a tax rate of 20%, while additional income up to £150,000 is liable for a 40% tax rate. See below the income tax brackets.
| Income | Tax Rate | Income rate type |
| Up to £12,570 | 0% | Personal allowance |
| £12,571 - £50,270 | 20% | Basic Rate |
| £50,271 - £150,000 | 40% | Higher rate |
| Over £150,000 | 45% | Additional rate |
Capital Gain Tax (CGT) - HMRC charges CGT annually for any forex trading profit. It’s derived from the difference between the sale and purchase price of the investment. The tax levied will depend on the investment type and the duration the asset was held.
For instance, if you purchase a currency for £1 and sell it for £1.5, the £0.5 profit is liable for CGT. Ultimately, CGT will vary depending on your income and tax bracket. The base rate applicable is 10%, and a ceiling of 20% for traders who pay higher rates.
Corporation Tax: This is tax paid on earnings made by companies. The UK government has recently revised the rates, which will be implemented from April 2023.
Have a look at the tax brackets for small and large-scale companies.
| Rate | Year 2023 |
| Small profits rate (companies under £50,000 profit) | 19% |
| Main rate (companies over £250,000 profits) | 25% |
| Main rate (all profits except ring fence profits) | —-- |
| Special rate for unit trusts and open-ended, investment companies | 20% |
| Small ring fence profits rate(companies under £50,000 profits) | 19% |
| Main ring fence profits rate(companies over £250,000 profits) | 30% |
Stamp Duty Reserve Tax: It is paid on buying shares which costs approximately 0.5% on the transaction. This tax is levied on transactions in different scenarios:
When existing shares in a UK company are bought
When shares of any foreign company with a share register in UK are bought
Note: Tax is applicable only on the price at which the shares are bought.
How Trading Activities Affect Your Taxes?
The trading activities heavily depend upon the type of instrument you are trading with. Spread bets and CFDs are the most often used instruments, providing certain tax benefits to traders in the UK.
Spread Betting
Spread betting is considered speculative and is classified as gambling instead of an investment. It involves traders guessing whether the market price will go up (going long) or down (going short).
Since the trader doesn’t own the underlying assets, they are not subject to CGT or income tax. The HMRC only requires the income to be reported as gambling winning. Losses from spread betting will not be eligible for any claim losses.
CFDs
These trading instruments fall within the definition of derivative contracts for Corporation tax purposes. Taxes are applicable to CFDs similar to those trading Bitcoin and other cryptocurrencies. It implies that traders are liable to pay CGT when trades close with a profit.
A 10% Capital Gains Tax applies if the annual profits from CFD forex trading are less than £50,270. The tax rate increase to 20% when gains surpass £50,270.
Assuming the annual and other income are set to zero, here’s how taxes apply.
| Profit from capital gains | Tax free CGT allowance | Tax rate | Capital gains tax | Profits after tax |
| £10,000 | £12,300 | 0% | £0 | £10,000 |
| £25,000 | £12,300 | 10% | £1,270 | £23,730 |
| £62,000 | £12,300 | 20% | £9,940 | £52,060 |
Do You Pay Tax on Forex Trading in UK?
Yes! Taxes liability on forex trading primarily depends on trader classification and trading instruments. Your annual income and trading frequency are some of the factors that may be weighed to determine the final amount you are liable to pay. In addition, When engaging in forex trading, it is crucial to understand the tax implications of your profits and losses, especially when using the best stock trading apps for seamless transactions.
