CFDs and Tax

A Contract for Difference (CFD) is a derivative that enables you to speculate on the price movement of underlying securities such as shares, indices and commodities over which the CFD is based without the need to own the instrument.

In simple terms a Contract for Difference is really a short term contract between the buyer of the Contract for difference and the CFD provider, with both parties taking an opposite view as to whether the value of the underlying security or instrument on which the CFD relies will improve or decline in price. CFDs are settled by way of a cash settlement which is calculated as the difference between the opening and closing price of the underlying security or instrument. If the difference is positive the CFD broker pays the difference, and the holder of the CFD will profit. Should the end result be negative, the holder of the CFD must pay the difference to the CFD broker, and the holder will incur a loss. As CFDs don't have an expiry date CFD positions can be held open indefinitely.

The Australian Taxation Office (ATO) has published a Tax Ruling TR-2005/15 ‘Income tax - tax consequences of financial contracts for differences’, regarding the tax treatment of financial Contracts for Difference.

The Tax Ruling states that if you're carrying on a business (or entering into commercial transactions) of buying and selling CFDs for the purpose of profit making, any gains made are going to be considered assessable income and any losses incurred will be an allowable deduction. The determining factor here is whether or not you happen to be in fact carrying on a business (or entering into a commercial transaction) the primary tests to determine this are outlined below:

1. The number of transactions you enter into each year (e.g. on a weekly or monthly basis);
2. The size and scale of your operations;
3. Whether or not you happen to be carrying on your activities in a systematic, organised and businesslike manner for the purpose of profit making; and
4. The amount of skill employed in performing these actions.

If you identify that you're not carrying on a business (or entering into commercial transactions), any gain or loss you'd normally make would fall under the Capital Gains Tax (CGT) provisions. As CFDs are regarded as a CGT-asset, any capital gains are treated as assessable income and capital losses are usually deducted from any present or future capital gain.

Because the ATO views Contracts for Difference as contracts of speculation, in that you're effectively betting of the fact that underlying equity or instrument will either increase or reduce in price, it would appear from the ruling that the aforementioned many not apply to CFD transactions. If so, any capital gain or capital loss you make ‘from a financial Contract for Difference entered into for the purpose of recreation by gambling’ is going to be disregarded under the CGT gambling exemption provision.

What this all means is that if you have made a $1,000,000 capital gain from a CFD trade and you can persuade the ATO the transaction was entered into for the aim of recreation by gambling, you will be laughing all the way to the bank. However, if the outcome were a $1,000,000 capital loss, you would lose the ability to offset the capital loss from any present or future capital gains that you may have.

Because the ATO views that Contracts for Difference are predominantly entered into for a profit making or betting purpose, it would difficult for you to declare a capital loss if you could not prove that you are carrying on a business or entering into profitable transactions.

For more information on CFD tax rulings in Australia, you should seek advice from your CFD provider or ask your accountant. You will find basic tax guidance in the PDS issued by your CFD broker, you would have received this document before you started trading CFDs online.

Article Source: http://gamblingarticlessite.com

The author Ben McGrath is a professional Contract for difference trader. Ben trades with Australia's most popular Contract for difference broker IC Markets. Ben has published a number of books and guides on CFDs, you can download and read his most recent guide to CFD trading and understand more about CFDs for free.

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