Do You Need to Pay Taxes on Trading?
There's a good chance that taxes will apply to your profits, and every country has different tax laws. If you're not sure whether you'll owe taxes, it's better to assume you will. However, not all your profit may taxed the same.
Will You Need to Pay Taxes?
As the famous saying goes, there are two guarantees in life… death and taxes. Trading is no different, and if the government can increase their revenue from your profits, it will. So, if you’re not sure whether you’ll need to pay taxes or not, it’s better to assume you will.
Every country will have different tax laws, and there will depend on plenty of secondary factors as well. But be aware, we aren’t tax experts, and penalties can be quite high for not paying them! Therefore if you are concerned you should contact an accountant or legal expert who can help you. However, unless you’re profiting from your trading, then I wouldn’t worry about this for now.
We'll cover some things you should consider that may affect your profit through taxation. After all, you’ll want to be as tax-efficient as possible. Unless, of course, you want to pay more tax! But that’s up to you.
The first thing to consider is whether or not you’re profitable. If you’re not yet profitable, you probably don’t need to worry about paying tax. Most countries tend to have a minimum earnings threshold for tax. For example, in the UK if you earn less than £12,570 overall, you may not have to pay tax on it.
On-screen, you’ll see the tax brackets for the 2024 tax year as a guide of what you may expect if you earn more than that.
Secondly, the type of product you trade can also change how much you owe. For example, in the UK spread betting and contracts for difference are similar derivatives you can use to trade a range of assets. However, they are both taxed differently.
At the time of writing this, spread betting is free from the capital gains tax, whereas CFDs aren’t. However, if you lose money using CFDs in tax year, you can also report that as a loss to offset your taxes, which you can’t do with spread betting.
Then, if you trade in traditional shares, you may also have to pay stamp duty since you’re taking ownership of the asset, unlike with derivatives.
As you can see, the type of product you’re trading can make a sizable difference to your tax bill, which will impact your profits. If you want to maximise your profit, you’ll want to avoid unnecessary tax. This is why many professional investors use different products, such as dividend stocks - to be more tax efficient.
Thirdly is how you’ve set up your business. If you’re trading full time, this may be done through self-employment and the tax you pay may be similar to the example we saw earlier. However, you may also have to pay capital gains, and stamp duty depending on what you’re trading.
In the end my advice is to do a bit of research to get a brief understanding of your tax laws, and if you think you may owe tax, then speak to an accountant. They're generally not that expensive and could save you a hefty fine if you get it wrong.