Quote from trader_uk:
Hi,
I am a new trader from the UK who is about to start trading the S&P 500 e-mini. I was hoping that there may be somebody from the UK who could tell me specifically what tax rules apply to day traders in our country.
In particular, are all trading profits subject to capital gains tax?
Is there any advantage to be gained from setting up a company and trading through that?
In addition, I would like to know how profits are reported to the Inland Revenue. Is it sufficient to send an account balance for the year from your broker?
If there is anybody who can answer any of these questions or point me in the right direction that would be much appreciated.
Cheers,
trader_uk
I will repeat what I said above, which is to ask a qualified tax professional (i.e. an accountant), rather than rely on a bunch of strangers on an internet forum whose knowledge is based mostly on hearsay and educated guesswork.
I trade from the UK and have employed both an accountant and tax lawyer for several years to handle my affairs, so I have a reasonable idea of how the tax structure works here. But you should not take my word for it, ask a good accountant.
Having said that, if you trade futures actively (e.g. intraday) then it will probably be taxed as income, not capital gains. So basically you would add your futures trading income to your income tax, and then calculate the extra tax payable on the additional income. If you trade infrequently, then it is a grey area. Generally you can choose to declare it either as income or capital gains, but you must be consistent each year.
There are some advantages to getting trading profits treated as capital gains, and some disadvantages. If it is classed as capital gains, you are exempted from any tax on the first £7700 per year. However, you cannot claim business expenses (e.g. quote feeds, market subscription services etc), and you cannot offset profits one year against losses another yeat. With trading income you can claim expenses so long as you can convince the Inland Revenue that your trading is a "business" and not "common speculation" (this can be hard unless you genuinely trade full time). You can also offset losses against previous profits (so you get a tax rebate) or against future profits (so you future years are tax free until you make back the losses).
You report the income by asking for a self-assessment tax return, and then simply stating on that what you earned (or lost). The Revenue simply accept your assessment, and charge you the tax payable, which you must then send to them.
There are advantages to incorporating, which include limited liability, the ability to claim expenses (a ltd company is assumed to be a business by default, so you don't need to convince the IR that it's not "common speculation"), and a lower tax level on profits retained within the company (this allows you to compound at a much better rate after-tax). The downsides are more paperwork, higher accountancy fees, loss of privacy (your name and address go on a public register; company profits are public knowledge), sometimes higher overall tax rates if you withdraw profits, and in some cases higher commissions from brokerage firms.
IMO it is not worth incorporating unless your strategy has a risk of you going broke and ending up owing money, you have large business expenses, or you are making £100k+ per year fairly consistently and don't need to draw the majority of it out each year.
