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CFD Tax Treatment

One of the advantages of CFDs over regular share trading is the comparatively favourable tax treatment of the former, providing traders with a more cost-effective way to invest. While the tax treatment of contracts for difference is naturally variable from jurisdiction to jurisdiction, the UK makes special provisions for CFDs as a result of certain of their characteristics, ensuring the trading model falls outwith the parameters of certain otherwise chargeable taxes.

Just like trading in shares, disposal of contracts for difference will attract capital gains tax liability to the extent to which any profits exceed the annual exemption. Bear in mind that capital gains tax is a complicated tax, with a variety of reliefs that may come in to play beyond the annual exemption amount, and so for more significant disposals it may be well worth seeking professional advice on the tax treatment, and any means by which capital gains tax liability can be minimised.

Where contracts for difference differ from the trading of shares is in stamp duty liability. Stamp duty is charged on share transactions at a rate of 0.5%, and unless you've got a keen eye you won't even be aware it's being deducted when trading through an online broker until you notice the corresponding dent in your trading account. When trading in CFDs, stamp duty is not applicable, given that is only related to the buying and selling of land and shares - CFDs being derivative, intangible instruments do not attract liability to this form of tax.

While this does present a saving of 0.5%, it doesn't necessarily mean CFDs are always destined to be the most profitable way to invest. For example, if you were looking to establish a long position in Company X over a number of years, you might be tempted to think that CFDs are the way to go to avoid paying stamp duty - in actuality, paying the 0.5% duty and investing pound-for-pound will circumvent the need for high interest and financing costs, which will in this case more often than not prove prohibitive for the investor.

Another key benefit of trading CFDs which makes them a vital tool to have in your locker is their flexibility, which presents a variety of options for legitimately managing your exposure to taxation. One of the most commonly witnessed examples of this pertains to so-called 'bed and breakfasting' - the illegal process of offloading assets at the end of one tax year only to instantly buy them back the next with a view to capitalising on allowances and exemptions on both sides of the financial year.

Provisions put in place to stop bed and breakfasting require that any shares reacquired in the 30 days following their disposal be treated as having never been disposed for tax purposes - however, clever management of CFDs can create the same tax saving effect without contravening the law.

When the positions are offloaded, simply opening positions to tie in the current market price with contracts for difference will guarantee you the ability to regain your shares at a future point outside of the 30-day period, thus allowing you to circumvent the tax liability you would otherwise face.

While these represent but a few brief examples of the taxation angle to CFDs, it is hoped that the flexibility and malleability of CFDs as a trading tool can be applied in creative ways to minimise tax exposure and reduce the likelihood of significant tax liability on any particular trade.

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NW11 7TJ,
England & Wales.

CFD Spy is a informational website based mostly around online trading, with a current focus towards CFDs, Forex, Stocks and Spread Betting. We aim to list and compare the top online trading brokers and brokerages available. Disclaimer: CFD Spy is meant for informational purposes only, whilst we do our best to make sure is up to date and accurate at all times, we do not make any claims that the content or opinions found within are infact accurate or up to date. Any websites, company/s or services referred to/linked to throughout are not directly affiliated with us, and their inclusion within CFD Spy is not meant to/ and does not convey our sponsorship or support of such company/s or website/s, furthermore, we are not responsible or liable for their availability, content, or delivery of services found therein.

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