UK taxation for futures and options trading

Discussion in 'Options' started by the learner, Mar 13, 2015.

  1. I live in UK and I see that there are 2 taxes when trading:

    - CGT to be paid on capital gain and is 18% or 28% depending if you are basic tax payer or not
    - income tax on any interest or dividend received

    But what happens if I trade options and futures? Please not that I'm not referring to binary options or spread betting that are exempt but to those contracts that are listed on exchange (i.e. the Eurostoxx futures and options that are exchanged on the Eurex market).

    If I ge erate a profit when trading these contracts what is the the tax that has to be paid? Is it CGT or income tax? Or something else?

    I can't find clear explanation on the HMRC website. Thank you.

    a tax on capital gain that is paid on any capital gain
  2. just21


  3. Thank for the answer but, as said, I want to trade the actual contracts from the exchanges (LIFFE, Eurex...). No CFD or bets.
  4. just21


    You trade futures using TT or software of your choice in normal way on the exchange so there is no extra spread or conterparty risk. Kyte are registered as a spread betting company so no CGT or income tax.
  5. But how does it work? Suppose I want to use Interactive Brokers to trade options. How do I use Kyte?
  6. I'm not a lawyer, but I've done some research on this.

    It's a capital gain, unless your trading is qualified as a 'business', in which case you'd pay income tax (you'd also be able to deduct trading related expenses from your income).

    How this qualification happens is a mystery, but possible requirements probably are:

    • earning the vast majority of your income from trading.
    • trading in such a way that requires time, skill and expertise, and isn't just raw speculation. So a market making firm would see their profits taxed as income.
    I'm just finishing up my first year of having trading as my only source of income. I've made some good money, which means my tax bill would be lower under CGT rules. It's also my only source of income. So it will be interesting how HMRC classify me - I'll let you know.
  7. Thank you for the answer. I am searching info on HMRC website but it is a real mess to be honest. So far I found these two pages quite interesting:

    Here it seems to confirm that profits generated by trading listed options are treated as capital gains unless you are a corporate (case 1) or the deal is risk free at inception (case 2). The last case is for option trades like box spread when they generate a risk free profit that would be treated as income.

    Here it says that profits are income and taxed at the trust's rate. But this should not work for me since I am an individual.

    To be honest, I didn't understand the following link:

    How do they know if I'm trading options to hedge some risk held elsewhere?
    Because in this case any profit would be treated as income I think.
  8. CG12310 (2) is less about box trades, and more about anti avoidance tactics (to stop my employer paying me in riskless share options, which I then pay CGT on).

    CFM50070.htm won't apply, since it's not like you are BA and selling oil futures because you've got to buy jet fuel next year.
  9. But there they say:

    "Where an income tax payer uses a swap to hedge interest rate risk, foreign exchange risk, credit risk etc arising from assets, liabilities or transactions that are integral to a property business, profits or losses from the swap will form part of the profits or losses of the property business - see PIM2140. This applies to non-resident companies that are charged to income tax on the profits of a UK property business, as well as to individuals, partnerships and so on."

    Is it just for business/companies or also for individuals willing to hedge some exposure?

    For example, I am an individual investor that has the main source of income from a different activity. I want to hedge a portfolio of (equity) mutual fund in USD or EUR that I hold somewhere. I would like to hedge FX risk and equity risk by using (listed) options and/or futures.

    Everything (both profits and losses) that is generated from from this activity will go under the CGT rules?
  10. Yes if you are classified as a non professional (which if your income is mainly from another source you almost certainly will be), you'll pay CGT on your equity exposure, and CGT on your hedge, or get relief as appropriate.

    Note that you can't 'mark to market' as an individual paying CGT. So you pay, or get relief, when you realise a CGT gain or loss. If your hedge is a future you realised a gain every 3 months whether you want to or not. This might result in a timing problem, having to pay CGT when you haven't really made any money, if your hedge is profitable but you don't realise an offsetting loss on your underlying equity exposure.

    If you are 'running a business' you will pay income tax on your equity portfolio, and on your hedge.

    You then have the option of saying 'this thing is a hedge for this' .
    You also have the option of mark to marking.
    You also have the option of saying 'this is being held for investment, this for speculation'.......

    .... derivative accounting is a hugely complex area. Unless you are trading in very large size you are unlikely to be able to afford to pay a decent accountant to save enough money from over complicating things this much.

    If I get classified as 'running a business' I intend to pay income tax on my realised net profits (equities, hedges and futures altogether), effectively the same basis as CGT, and not worrying about unrealised mark to market, classifying hedges or any of that nonsense.

    #10     Mar 14, 2015
    Yeti77 likes this.