Tos and binary options trading uk tax returns
An option, in the eyes of HMRC, is an agreed right to buy or sell an underlying asset at a specified price within a specified timeframe. It tends to have an inherent value in itself which carries CGT implications. See CG for the formal definition. Binary options present individuals with the opportunity to benefit from fluctuations up or down in, for instance, the price of individual shares or the performance of indices such as stock markets or currency markets.
These are derivative products; which means you do not have any ownership in the underlying asset at no point do you own the share in question, for instance. In fact, there are only two possible outcomes once the option expires: HMRC will almost always regard this as a form of gambling: Cases that have gone before the courts help to shed light on this.
A more recent case Hakki v Secretary of State for Work and Pensions  EWCA Civ concerned a professional poker player who made a living through his winnings and who was facing a child maintenance payment order from the Child Support Agency. The Court of Appeal once again confirmed the general principle that gambling is not a trade. So even if your only source of income is from binary options profits, it seems unlikely at present that profits would be deemed liable for tax.
But do not rule it out completely. The answer, in the majority of cases, is likely to be no as it is not classed as income for tax purposes. But as ever with tax, it all depends on the context. Use this general guidance and consider your position carefully. You will be liable to pay business tax, or the obligations of those who fall under the third tax bracket. If you are classed as a private investor your gains and losses fall under the capital gains tax regime.
The benefits and drawbacks of which are detailed further below. Whereas, an investor, will hold shares for use as assets to then generate income, dividend income, for example. This is important because a share trader will pay income tax, whilst an investor will pay capital gains tax. If you were classed as a trader you were able to offset more expenses.
Share investors, however, allowed for tapered relief and your annual exemption to be offset. Having said that, there were genuine investors who held onto shares and assets for a long period of time.
However, April brought with it change. This gives the majority of investors a substantial tax advantage over traders. The additional tax relief on expenses probably would not make up for the significant reduction in the tax rate for investors. As a trader, you have more flexibility in regard to the treatment of losses. Instead of being carried forward to be offset against further capital gains, you can offset the loss against any other income for the tax year of the loss.
Due to this supposed advantage of investor status, day trading tax rules in the UK may toughen up in coming years. Whilst tax rules and regulations remain somewhat grey, judicial decisions and best practice have clarified certain criteria and factors. Despite being one of the hardest areas to make an accurate determination on, this is a vital component. If HMRC believes your motivation for trading is to generate profits, this will impact on whether they consider your activity as trading for the purposes of taxation.
Of course, they do not simply take your word for it. Instead, they look at the facts surrounding your transactions. They consider the following:. HMRC can examine the circumstances surrounding the transaction to identify a trading motive. They will consider the following:. Whilst all of the above factors are taken into account to determine your financial trading tax obligations in the UK, on the whole, instruments that generate an income are classed as investment assets.
In particular, stock trading tax in the UK is more straightforward. This is because there is a higher chance share trading by its very nature will be classed as investments. So, stocks do bring with them some advantages in comparison to options trading taxes, for example.
The case brought by Mr. Akhta Ali was a defining case in UK trading taxes. Akhta Ali successfully appealed a decision brought by HMRC, a number of common misconceptions were put straight. The case brought much-needed clarity in considerations around day trading profits and losses, in particular. This meant they would be subjected to the same sole trader tax rate as ordinary businesses in the UK.
His losses which were in the hundreds of thousands of pounds were allowed to be offset against the profits earned by his other business.
This resulted in significant deductions in his overall tax liability. In fact, in a number of preceding years a tax calculator established his liability has virtually zero. Ali ran a successful pharmacy business. He wanted to day trade shares as a second legitimate business.
So, whilst investing his shares he reported the profits and losses in line with capital gains regulations. In he decided he was now a day trader. He argued his activities were done with the intention to generate income.