Spread betting tax: Is spread betting tax-free?

When choosing the right type of trading, it's important to consider all possible financial implications. One of the most important is how much your gains might be taxed. But is one of the most popular forms of trading, spread betting, tax-free?

In this article, we look at the tax benefits and implications of spread betting in the UK and Ireland. Learn how much tax is owed, the reasons behind the activity's tax status, and how the rules differ for another popular form of trading, CFD (contract for difference) trading.

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What is spread betting?

Spread betting is a form of trading where you bet on whether the value of a security will rise ('going long') or fall ('going short').

It involves placing leverage to open a position - putting down a portion of the value of the position (known as a margin) to wager the full amount.

Next, you choose how much to bet on each point of price movement (such as the Apple share price), and the direction (higher or lower) in which it will move.

With each point of movement in the direction bet upon, your profit rises in line with your bet. If it travels in the opposite direction, your losses rise in kind.

So, if you bet £50 that Amazon shares would rise and they increased from 105 to 115 points, you would earn £500 profit. If they dropped in this scenario, you would owe your spread betting provider £500.

With spread betting, there are typically zero fees to pay your provider due to the buy prices of securities being very slightly higher than the sell prices - the 'spread'. It's also crucial to know that utilising leverage magnifies profits and losses and can result in losses exceeding the margin required to open the position. As such, always be sure that you can afford the potential losses before you trade.

Do you have to pay tax on spread betting in the UK or Ireland?

No, typically you will not need to pay tax in the UK or Ireland when spread betting. As of November 2022:

• Capital gains tax: Profits are exempt from capital gains tax (CGT), though losses can't be offset against capital gains tax on the sale of chargeable assets.
• Stamp duty: Spread betting is exempt from stamp duty in the UK - this tax is only levied when shares are purchased outright (at least 0.5% of the transaction, according to the government).

Can spread betting be subject to income tax?

Spread betting in the UK and Ireland is exempt from income tax in most circumstances.

The only circumstance in which you would be likely to pay is if spread betting is your main source of income, thereby forming your business or trade. If you have a main occupation and do some spread betting on the side, this would not be liable for income tax.

How is spread betting different to trading with CFDs?

While spread betting is generally tax-free, CFD trading is affected by taxation. Here are the main differences to consider:

• Capital gains tax is payable on CFDs, unlike spread betting.
• CFDs sold by a limited company will be subject to corporation tax, unlike spread betting, which cannot be undertaken by a business entity.
• CFDs are available for people around the world, not just those in the UK and Ireland, as is the case with spread betting.
• CFD trades are charged a commission by the provider, as opposed to the provider making money from the difference between buying and selling securities, as is the case with spread betting.
• Some CFD trades may be subject to holding costs, unlike spread bets.
• CFD profits and losses are calculated by multiplying the difference in price between entering and exiting your position, and the number of CFD units that you have bought. In spread betting, you multiply the difference in price by your stake.
• Corporate accounts are available for CFD traders, while spread betters cannot open corporate accounts. Learn more about FXCM's corporate accounts.

Both instruments involve placing wagers on price movements. Stamp duty tax is not payable on either CFDs or spread betting, and both products involve the use of leverage. The timespans of each type of trade are short-term (daily to monthly), and trades can be made across the same markets.

Why is spread betting tax-free in the UK?

Spread betting is tax-free in the UK because it is regarded by HM Revenue and Customs (HMRC) as a speculative bet as opposed to an investment.

According to the HMRC's internal Business Income Manual advice on spread betting, to be taxable, profits must arise from the carrying on of a trade, not the opportunity presented by it. Whether a spread bet is taxable is thereby dependent on the contract terms and "economic substance of what is done".

This means that, in rare or unique circumstances, such as if a spread better were making extreme gains or treating the activity as their main occupation, then HMRC might investigate the case. This is unlikely to happen, however. If you are unsure of your own position, get in touch with HMRC.

An example of the benefits of tax-free spread betting

There are several tax benefits available for people who choose to spread bet - namely the lack of capital gains tax or stamp duty - but to what do these gains equate?

If you were to buy 500 shares in a company for £10 each, then sold these when their price reached £15, you would gain £2,500 in profit.

If capital gains tax were 20% and stamp duty 0.5%, then 20.5% tax would be levied on your spread betting profits - £512.50 total, leaving you with £1987.50 in net profit.

However, if you chose to make the same trade via spread betting, you would make the full £2,500 profit.

What's more, given the use of leverage, with spread betting you would not have had to purchase £5,000 of shares to begin with, but may instead have been able to make the same trade using £1,000 of capital. That said, leveraged trades do leave you exposed to far larger losses if your prediction doesn't bear fruit, so always be sure that you can afford the worst-case scenario before you place a trade.

How much does spread betting cost?

FXCM offers full spread betting capabilities to account-holders, but how much does it cost?

First things first, there is no tax or commission to pay on your spread bets at all - the cost of opening a trade is factored into how spread bets are priced.

For example, if you decide to spread bet on a forex market like EUR/GBP which has a sell price of 0.85836 and a buy price of 0.85846, FXCM makes 0.00010, multiplied by your stake, on each trade.

Start tax-free spread betting with FXCM today

Choose FXCM for your spread betting and enjoy tax-free trades across hundreds of instruments, from commodities to forex, shares and indices.

With our cutting-edge spread betting tools, strict standards, and extensive and ever-growing library of expert learning resources, you can become a better trader and take advantage of opportunities in the markets. And thanks to leverage, you can open larger positions than if you were purchasing securities outright. All tax-free, with zero commission.

Enjoy tax-free profits when you take a position on rising or falling markets - spread bet with FXCM today.