When considering the tax treatment of profits and losses on CFD (“Contracts For Difference”), there are some basic scenarios you may need to determine first:-
- Speculator – a speculator is not a trader or a gambler but who may trade on a one-off or semi-regular basis. If the CFDs were entered into for the purpose of making a gain, then this gain and/or profit is taxable. On the same token, when a speculator made a loss, then the loss is deductible for tax purposes.
- Hobby trader/ Gambler – who will typically show losses rather than profits. This type of CFD trader can not claim any tax benefit from those losses and get to keep any gain (providing the gains are not large) made in the process.
- Trader who trades on a regular basis – if you approach CFD dealings with frequent trading activities and doing it systematically, keep careful records and a business plan – then the tax situation is fairly simple. Trading profits are assessable as ordinary income, after deducting trading losses and expenses incurred in trading.
- If the purpose of the CFD trading is to hedge certain risk associated with a Capital Item, then any gains and losses may be able to be treated on capital account.
Typically, allowable deductions would include brokerage, finance journals, advice from advisers, and essential software such as a charting package.
Further, GST consideration – you can not claim credits for Goods and Services Tax on any expenses you incur in trading CFDs as they are effectively financial products that are input taxed under the legislation. Accordingly, even though you may incur expenses inclusive of GST, no claim is possible since you are not charging and collecting GST in your CFD trading activities.
Please be advised that the above information should be used as a guide only as the tax treatment of such activity would change from time to time.
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