Taxes when trading options and futures

the_learner

Hi, I am UK resident but not UK citizen. I moved my residence in UK for tax purposes since I work here and this is my only income source.
I am planning to trade options and futures on EUREX market by using Interactive Brokers.

Can you please tell me how profits are taxed in this case? Are they still subject to CGT thus benefit from the tax free annual allowance?
Or, since these instrument are derivatives, a different taxation applies?

the_learner

Anyone knows the answer to this question?

chrismac1

Spread bets, futures and options are exempt. CFDs are subject to CGT.

the_learner

chrismac1 wrote: »

Spread bets, futures and options are exempt. CFDs are subject to CGT.

Can you please link some reference? Cause I can't find any reerence to options and futures (while I saw that spread bets arr exempt). Thanks.

P.S. I am referring to options and futures that are traded in regulated markets (like Eurex). So it's not like binary options.

Cook_County

You could of course trade offshore, claim the remittance basis (and probably make a section 16ZA election) and potentially pay no UK tax at all if the proceeds are never remitted to the UK.

the_learner

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:

1) http://www.hmrc.gov.uk/manuals/cgmanual/CG12310.htm
Here it seems to say that profits generated by trading listed options are treated as capital gains unless you are a corporate (case 1) or the deal is structured to be risk free since inception (case 2). In both cases profits are treated as income.

2) http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM3235.htm
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:
http://www.hmrc.gov.uk/manuals/cfmmanual/CFM50070.htm

How do they know if I'm trading options to hedge some risk held elsewhere? They say that this applies to both corporate and individuals.
In this case any profit would be treated as income I think.

Dead_keen

chrismac1 wrote: »

Spread bets, futures and options are exempt. CFDs are subject to CGT.

Futures and options are subject to capital gains tax (unless they are employment-related, part of a trade or, effectively, giving you an interest-like return). As you say, spread bets are not taxable (but if they are linked to an employment, I would not hold your breath on that one).

the_learner

Thanks how can you say if an option strategy (e.g. butterfly) is "part of a trade"?

the_learner

I have another doubt. Sorry in advance for these stupid questions.
I am planning to open an account with Interactive Brokers to trade options, futures and ETFs.

So, reading messages above, it seems that any profit and loss that I will generate will be treated as capital gain (so not as income) thus calling for CGT.

But what happens if the contracts I trade are listed outside UK?

For example, suppose that I trade options and futures on german DAX index (both listed on the Eurex market). These contracts are listed in EUR and suppose that I generate a profit of (equivalent) £1,000.

Being less than the UK tax free capital gain allowance, is it correct that I don't have to pay any tax on the £1,000 profit?

Or does the fact that the contract are listed outside UK play a role here? Similarly, is the fact that profits are in EUR playing a role here?

Thank you very much.!

P

Cook_County

No difference at all as you using an onshore broker. If you want to legitimately avoid CGT you can keep the money offshore and elect to claim the remittance basis. This may of course cost you the remittance base charge.

the_learner

Thanks. So being a UK broker I shouldn't have any problem with this.
The only thing that is not clear is how does it work if the investment is held in EUR. If I trade on EUR denominated options and futures then any P&L will be in EUR. But for tax purposes HMRC wants the GBP equivalent?
Do I need to convert from EUR to GBP every single P&L I realize So that in my tax return I can put the total amount in GBP?