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Tax Efficient Trading

Whenever you are engaging in transactional activity, it's important to have a think about the tax consequences of your actions. While a trade might look juicy in prospect, understanding the impact of tax is critical to accurate forecasting and remaining in compliance with the law. Fortunately, the savvy trader is able to take advantage of provisions in the tax statutes that allow for certain reliefs and discounts to be factored in to the annual trading tax bill. But firstly, it's important to understand exactly how CFDs are taxed and what liability you may be opening yourself up to face.

Tax Treatment

In the UK, CFDs are exempt from stamp duty but do attract capital gains tax (CGT). This is a tax payable on increases in capital, similar to income tax for lump sum asset disposals. Because CFDs are assets that look specifically at the difference in capital, they are regarded as taxable for CGT purposes. This gives rise to tax at 18%, or 28% for higher rate tax payers, and can therefore account for a substantial proportion of your profits. There is clearly a real incentive for traders to look to reliefs and discounts afforded by law, and there are several easy tips you can integrate into your trading that will save you money without the need for an accountant.

Use It Or Lose It

Each tax year, individuals have an annual exemption for capital gains above which CGT is charged. For the year 2011-2012, the annual exemption stands at 10,600 per person, meaning that the first 10,600 will be tax-free. Remember that this covers all asset disposals in the year and is not restricted to CFD transactions.

This amount is extended to every UK citizen on an annual basis, and cannot be rolled over from one year to the next. This leads to some distortions in the CFD markets as traders look to sell up early to take full advantage of their annual exemption, only to later buy back the positions with access to a new year's annual exemption on the same transaction. This process was known as bed and breakfasting, and has since been restricted by regulations requiring a period of around a month after the disposal before the same instruments can be bought. However, there are similar techniques that can be used by traders to ensure the benefit from their entitled annual exemption before it expires.

Carrying Losses

Another effective way in which taxes can be reduced is through carrying over any losses into the following tax year. If you realise a loss from your CFD trading activities for the year, this amount can be carried forward as a deduction from your next profitable year. This has the effect of making it feel like a tax discount when you do realise a profit. Remember also that there may be legitimate reasons for making a loss from your trading, and it may be the case that it works out financially beneficial to do so.

While there are several strategies traders can deploy today, the laws surrounding CGT and how CFDs are taxed are subject to constant scrutiny and change. For that reason, its critical to pay close attention to the treatment of CFDs for tax, in order to ensure you remain fore mostly above the law, and second in the strongest possible position to minimise your liability.

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Independent Trading Solutions Limited
788-790 Finchley Road,
NW11 7TJ,
England & Wales.

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