I am in touch with an FX trader in the UK. He trades on different FX markets. I invested 15,000 with him, on which he pays me a monthly 3 per cent return. So each month I get approximately 420 paid into my bank account. Sometimes its a bit more thats an approximate figure.
This comes under the spread-betting sphere he assures me from which income generated is not taxable in the UK or Ireland.
I started doing this six months ago. I am wondering are there any other tax implications for this income, or can I just keep on reviewing?
Mr D.L., email
Trading currencies can be a volatile business; spread betting only increases that volatility risk. It does sound like that is what your UK-based trader is up to. I hope you know what youre doing. And I certainly hope you have placed a stop to limit losses should your traders bets turn sour.
Basically, in spread-betting you are gambling on the future price direction of the underlying asset. In the case of foreign exchange trading, your trader is betting that one currency will strengthen (or weaken) compared to another currency. If you think itll weaken, you go short; if your view is that it will strengthen, you go long.
You bet a certain amount on each point that a bet moves in either direction. If you bet 5 a point long on the dollar against sterling and the dollar advances against the British currency, you win. But, if sterling firms relative to the dollar, you are out of the money and it could prove costly.
For currencies, which I gather are generally quoted out to four decimal places, the point is that fourth decimal place.
So if, for example, the dollar is trading at $1.3401 against sterling when you buy and moves to $1.3521 when you close the bet, your 5/point bet has made you 600 (5 x 120 points).
Of course, if the dollar weakens to, say, $1.3240, you will be on the hook for 805 (5 x 161) and if you dont close the bet those losses could keep mounting.
The real peril in spread-betting is margin. You only have to put up a fraction of the potential stake on the bet. Thats makes it very accessible for investors with modest stakes. But it means that both winnings and losses can be magnified.
Thats fine on the winnings side but if the bet runs against you, the potential loss is open-ended unless you have placed an instruction to close the bet and accept your losses at a certain financial point. With spread-betting, chasing losses in the hope a bet will come good is generally a one-way ticket to the poorhouse.
But what about the tax?
This is one of the major attractions of spread betting. In both Britain and Ireland, spread betting is not subject either to capital gains tax or, with one significant caveat, to income tax.
The exemption to capital gains tax (CGT) is fairly logical. CGT is assessed on gains from the sale of physical assets, but with a spread bet, you never actually own anything: youre simply betting on the movement of an underlying asset.
Its not beyond governments to change their view on this as budgetary needs or a view on the proliferation of such untaxed income emerges but it would need legislation so there would be plenty of advance warning. And theres absolutely no suggestion of anything like that at the moment.
On the income tax side, betting wins generally are not seen as subject to taxation. This applies to lotteries and sports betting, and the same principles apply to spread betting.
But, its not entirely a blank cheque. The issue is whether the betting (and winnings) are incidental, or whether they can be seen as part of your trade. If the latter, then yes, the Revenue Commissioners would argue, they are taxable.
The real question is, if this activity forms a regular part of your activity, how do you determine whether its a trade? Revenue says it looks at it on a case-by-case basis; legal analysts think it would need to be very much part of your working business for Revenue to be able to enforce taxation if challenged.
Id imagine Revenue will look both at what share of your income is accounted for by spread-betting earnings and also what other employment earnings you have and in what type of business.
The bottom line is that, in your case, I doubt Revenue will consider these winnings taxable.
The flip side, of course, is that if you get a losing bet, you cannot offset those losses against other taxable gains under CGT rules in the same way that you could if you owned and sold a physical asset, such as a share, at a loss.
To be perfectly honest, my view is that if you did not have a very clear understanding on spread betting including the tax implications then you probably shouldnt be playing that game, but thats your call.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.
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