Where do I stand with eToro?

Malthusian

Trunk_z wrote: »

Would I work out the GBP at the time of calculating and paying the tax?

The rate of GBP to USD at the point of purchase and sale is what matters.

If you buy a shareholding for $100 in October when the rate is $1 = 90p, and sell the holding in November for $120 when the rate is $1 = 110p then your purchase cost is £90 and your proceeds are £132 so the gain is £42.

Even if you actually purchased the $100 dollars you used to buy the investment in September at $1 = 80p, that's irrelevant - you still use the exchange rate in October and November.

So in addition to purchases and sale costs you will need to record the exchange rate at the point of each purchase and sale.

Remember that you can net losses against profits. So if eToro sell shares creating gains of £20,000 but other sales create losses of £10,000, you have no CGT bill.

You would need an extremely large sum of money invested with eToro and exceptionally good performance to have a CGT bill at the end of the year.

daryah

There are three possible outcomes depending on how its analysed by a tax specialist and presented

1. CGT. You could give overall gains or loss figures and HMRC may be fine, or they may ask for a working out. Not sure if eToro can provide a breakdown of trades it's executed on your behalf that you may need to pull

2. Self employed income. If this is like a second job then profits subject to lower business tax rates

3. Gambling profit. No tax due. This is the case for spread betting and am currently copy trading on Ayondo. Any gains for me I presume are tax free.


I am interested in eToro as well but am researching day trading before getting in fully. Right now it seems there is little consistency in how HMRC treats this and they had a ruling against them in the courts over how a day trader reported their taxes.

Malthusian

daryah wrote: »

2. Self employed income. If this is like a second job then profits subject to lower business tax rates

No they aren't. If you are self-employed and claim your net gains as self-employment income, you would be taxed at a higher rate than CGT and you wouldn't use your CGT allowance, so it would be a daft way to report your gains.

If you traded via a limited company and reported gains as profits you would pay 19% corporation tax on profits, which is higher than the basic rate of CGT (10%) with no allowance, though marginally lower than the higher rate (20%). Plus you then have to get the money out of the company into your pocket, which is also potentially taxable. Then there is the cost of incorporating on top.

The crucial thing about the HMRC case you referred to is that it involved someone who wanted his losses to be treated as trading income, not gains. Mr Ali was a pharmacist who wanted to set his losses from gambling on shares against his income from his business, thus paying less tax on the pharmacy earnings. HMRC naturally objected to the concept of someone being an investor when the CGT tax treatment suited him and then suddenly becoming a self-employed trader when he started losing money and the self-employed income treatment suited him. But leave that to one side.

The most important thing to remember is that Mr Ali still lost money by day-trading even after setting his losses against his pharmacy income - he would have been better off had he not turned to gambling. Let's say his pharmacy generated £20,000 of income over his personal allowance, taxable at 20% (I can't be bothered to look up a 2005 tax table) and he lost £10,000 on gambling on shares. By successfully claiming £10,000 in losses against the pharmacy income, he's saved £2,000 in tax. Unfortunately, he's still down £8,000, while the taxpayer is down £2,000.

So if you think the ability to set trading losses against other income could be an advantage, you are missing something rather important about the nature of losing money.

In the long term there is only one possible outcome - all gamblers lose their shirt, and there is no tax payable on losses.

TheMoniac

Trunk_z in case you are not aware - a capital gain or loss is made at the time of the trade, not the date the money is withdrawn or appears in your bank account.

This is something to be aware of approaching the end of a tax year 5 April. If you make the trade which results in a profit or loss prior to or on 5 April, then the capital gain or loss belongs on your tax return for that year regardless of whether you withdraw the money into your bank account.

daryah

Thanks for the detailed clarification

On the topic of CGT can't one offset losses in one year with gains in the next year, without incorporating?

On the topic of gambling, after doing my research I must say I have become confused with the definition so would be keen on yours. Between the scenarios below what is gambling and what is not?

1. purchasing and holding shares
2. starting a company based on an innovative product you feel people want
3. buying and holding shares for a short period (day trading)
4. trading in something called CFD
5. spread betting (which is somehow different to trading in CFD)

AnotherJoe

5 is betting / gambling the rest aren't.

And without getting involved in semantics, since I understand you could argue that all of them are betting, the only opinion that matters is HMRCs

You can carry losses forward for the purposes of CGT just not losses from betting.

Malthusian

daryah wrote: »

On the topic of CGT can't one offset losses in one year with gains in the next year, without incorporating?

Yes.

Though if you gamble throughout one year and then gamble throughout another year it's irrelevant, as you will have no gains to set the loss of your two shirts against.

If you gambled on day trading in one year and then invested sensibly the next year (the reverse of what Mr Ali did), you could set your losses in year 1 against your gains in year 2. But you would have even more money if you just invested sensibly in both year 1 and 2, even after paying the bigger tax bill. And you need an extremely large portfolio or very high gains to have a CGT tax bill anyway.

On the topic of gambling, after doing my research I must say I have become confused with the definition so would be keen on yours.

Anything with a long term positive expectation of return is investment. Anything with a long term negative expectation of return is gambling.

Between the scenarios below what is gambling and what is not?

1. purchasing and holding shares Investing, provided the shares are sufficiently diversified, you hold them for the long term and do not invest with borrowed money
2. starting a company based on an innovative product you feel people want Neither, this is called "work"
3. buying and holding shares for a short period (day trading) Gambling
4. trading in something called CFD Super-moronic gambling (because you can lose more than your stake, unlike long-only day-trading, dogs or roulette)
5. spread betting (which is somehow different to trading in CFD) Super-moronic gambling

*edit* Also, the difference between CFDs and spread betting is that with spread betting, the Financial Conduct Authority doesn't have to take your calls when your spread betting "broker" closes their website and disappears with your money.

CFDs are a regulated activity whereas spread betting is the Gambling Commission's problem.

daryah

Interesting, I didn't think that one years folly of losing in gambling can be recovered through gains in the following years redemption in sensible investing.

Think FCA have taken over regulation of spread betting regulation this year...

daryah

Hi All

Trying to get back to the topic of eToro and the innovative product they have developed and focussing in on the copy trading aspect...

Copy Trading essentially is, as far as I can tell, the purchase and sell of shares/assets based on trigger points from someone other then the investor. So if I like the past history of a trader and the investment approach/philiosophy, I can simply "follow" that trader as I would follow anyone on a social network. At that point onward the buys / sells that would occur would be at the discretion of the (followed) trader. Note here that the followed trader is really only making decisions on their own portfolio and the follower is piggybacking on their calls.

The thing here is that I believe the follower trader is for all intents/purposes from the HMRC's point of view acting as if they are purchasing / selling the shares directly. So, in this situation the CGT is not on the withdrawal of funds from the eToro (brokerage) account, but on the individual sell trades that have occured during the year. eToro has conveniently said all account holders are on their own with regards to their local tax returns, but do provide an account summary which lists all the trades to help in the calculation.

So my thoughts are at this stage, that at the end of each tax year,, and not on withdrawal from the account, one must go down the account summary and see what CGT has occured on individual trades and then report the cumulative figures on the SATR. If HMRC come knocking on the door, one must be able to surface the detailed calculations that support the reported figure. Now the thing is I am hoping this process is relatively straightforward and the number of trades in a year is manageable to report.

@Trunk_z: Based on your activity, how many sale trades have occured in your account within a year?

Malthusian

daryah wrote: »

Interesting, I didn't think that one years folly of losing in gambling can be recovered through gains in the following years redemption in sensible investing.

It can't. If you offset a CGT bill at 10% CGT against gambling losses, you recover 10% of one year's folly. However you have still lost 90%.

Furthermore, many people investing in shares who use their allowances (ISA and CGT) on a regular basis will never have a CGT bill to offset their losses against.

Think FCA have taken over regulation of spread betting regulation this year...

I stand corrected, the FCA considers spread bets to be contracts for difference (which of course they are) and therefore in theory, offering spread betting is a regulated activity. However, this article from last year suggests they have kicked actually doing something about it into the long grass.

Re copy-trading - you are correct, essentially this is discretionary management and you need a breakdown of all purchases and sales in the tax year, and the capital gains applying, so you can report any gains to HMRC if necessary. If the platform can't provide that, you would be bonkers to invest.

However, this is moot as copy trading is still day-trading and unless you are exceptionally lucky, you won't have any net gains to pay tax on. This old post of mine explains how copy trading works.

Talking about CGT on gambling wins is a waste of mental energy unless you've actually already generated over £11,000 in net gains. It's like buying a lottery ticket and then sitting there wondering how you're going to spread your millions over enough banks to keep it under the FSCS limit. You're not going to win the lottery. The point of playing the lottery is to fantasise about spending the money, not think about footling financial concerns that aren't ever going to arise.