Trading Legal Matters: A Look at Tax Regulations for Forex Trading

Trading has risen in popularity in the UK over the past few years. Aspiring investors are downloading retail trading platforms to easily invest their money, as illustrated by Hargreaves Lansdown, which experienced a 40% jump in net new business in the final half of 2020. Meanwhile, Trading 212 temporarily paused new account openings due to the record-high demands for investment products, including currencies.

More British traders are engaging in investment products like foreign exchange so that they can increase their savings and improve their financial wellbeing. This rapid growth means it’s especially crucial that lawyers understand the regulations on financial investments. With the high interest in these financial products, there’s a growing market for lawyers who understand regulations and legal restrictions regarding foreign exchange (forex) trading.

Understanding UK’s Tax Regulations on Forex Trading

The HMRC assesses one’s total forex trading profit after deducting losses and allowable expenses like deductions, capital allowances, and flat-rate expenses. On top of that, the department will assess the duration, frequency, and quantity of one’s trade. These steps are all crucial, since what’s left of the profits will be subjected to a certain tax bracket.

Aside from the salary bracket of investors, the HMRC also considers the investment products utilised in the trade. Amongst the two most popular forex products in the UK, spread betting is listed by FXCM’s trading demo as being risk-free for investors who are still trying to understand market charts and technical indicators. Numerous beginners test-drive their investments using demo accounts and spread betting forex products, which is why this product is generally considered as speculative trading. Since this type of trade is accounted as speculative/gambling, the profits are exempted from capital gains tax.

Meanwhile, Contract for Differences (CFDs) is a forex investment product that is typically traded over a long period of time. In this case, an investor and a CFD broker follow a contract wherein one party pays the difference in the value of a financial product between the opening and closing time of the trade. These parties speculate on the price movement of a product, and investors make a profit depending on the direction of their chosen asset. Since the HMRC considers the duration of the trade, forex CFD traders that have earned less than £50,000 are subjected to pay around 10% for their capital gains tax.

The Role of Lawyers in Forex Trading

Individuals aiming to become a tax lawyer or a part of an investment legal team will need to familiarise themselves with tax regulations and forex investments, especially now that there’s a greater interest in these financial products. Our article on ‘Silicon Valley’s Con Artist of the Century’ highlights how an investor’s legal team needs to aid them in deploying capital with due diligence to uncover any mischaracterisations. However, a legal team should also ensure that the investor follows tax laws and other regulations to avoid any anomalies.

Now that forex has become the crown jewel of London’s financial sector, Reuters reports that lawyers are also paying more attention due to a class action lawsuit against JPMorgan, Citigroup, Barclays, YBS, NatWest, and MUGF Bank. The European Commission discovered that these banks shared commercially sensitive order information, transaction prices, and other sensitive details. With all eyes on the finance sector, it’s all the more crucial for lawyers to be involved in investment decisions.

The UK’s tax laws are more lenient to forex investors, as compared to the regulations in other countries. As the environment goes through its growing pains, lawyers need to ensure that investors follow the due process and avoid any anomalies during their transactions.