Day trading tax in the UK

Most people pay Capital Gains Tax rather than Income Tax on their net profits. With a broker, a contract for differences (a CFD) settles in cash the price change of an asset. You don't own the actual share or currency involved. Unless your profits are business trading income, HMRC applies the capital gains rules to retail CFDs in almost every case.

Closing a CFD combines all credits and debits on your account into one calculation of capital gains or losses. This covers broker commission and any daily financing charges or dividend adjustments. Those adjustments don't appear as investment income in your return, since interest and company dividends never actually change hands. If you trade CFDs against stocks, you avoid stamp duty reserve tax, unlike direct share purchases.

The annual tax-free allowance comes off first, then Capital Gains Tax applies to the rest of your total gains. For an individual, the allowance is £3,000; for a trust, it's £1,500. Deducting allowable losses from your gains can also reduce your tax bill.

Profits from spread betting normally don't attract Capital Gains Tax or Income Tax. With spread betting, you bet on whether a market price rises or falls, without buying the asset. UK tax law doesn't treat betting and gambling as carrying on a trade.

HMRC views you as placing a bet, so your wins are tax-free. Instead, tax on business profits falls on the bookmaker who organises the spread bet. One drawback of spread betting versus CFDs is that you can't claim tax relief for losses.

The exception applies only when your spread betting wins come directly from an existing trade you carry on. Merely having a trade that gave you a chance to place a bet isn't enough. HMRC reviews the contract terms alongside the economic reality of your activity.

To judge if you're running a business trade, HMRC and the courts weigh up the impression your activity creates overall. Income Tax is payable under day trader tax UK rules only if the facts all point to you carrying on a trade. A daytime job doesn't prevent evening activity from counting as a business.

We judge each case against the pointers that HMRC and the courts call badges of trade. One badge alone doesn't settle the question. Seeking profit, making repeated transactions and selling assets quickly can all point towards trading. HMRC still considers each badge against your exact circumstances.

Some badges don't fit financial markets such as forex trading or prop firm trading. While some badges may point towards a trade, others may point away from one. If you're unsure whether your activity counts as trading, contact HMRC for advice.

A Self Assessment tax return is required where you owe Capital Gains Tax for the year in question. In the UK, the tax year starts on 6 April and ends on 5 April. Self-employed sole traders with earnings above £1,000 before expenses must also send a return.

Instead of deducting expenses, people with trading income can use a tax-free trading allowance worth up to £1,000 each year. When your gross trading income comes to £1,000 or less, you usually don't need to notify HMRC of it. Registration is still needed to claim a loss on your return, or to pay National Insurance voluntarily.

These are the main steps for reporting your day trading for the tax year:

1. HMRC may charge a penalty for poor records, so your records of statements and trades must be accurate, complete and readable.
2. When you need to send a return, sign up for Self Assessment by 5 October, once the tax year has ended.
3. Submit a return with net capital gains, or with trading income after taking the £1,000 allowance or expenses claimed.

This gives general information on the tax rules, but it isn't tax advice.