Are you a trader or an investor? You might not have thought about that distinction before, and it’s a question only partly asked to determine how you go about your business.
There are other considerations as well, and one of those is your tax position. You might not know this, but the distinction between trading and investing is key to whether you will pay tax on your earnings or not – and how much.
The landscape for determining whether you need to pay an eToro tax (or tax on earnings with any other broker) in the UK is complex and layered, so let’s try and break it down for you here.
Tax reporting for traders
If you reside in the UK and make a profit on your trades/investments, you might have to pay tax on your earnings.
The decision, ultimately, lands at the door of Her Majesty’s Revenue & Customs, that will consider a number of factors before deciding your tax position.
Just some of those considerations will include how often you trade, the amount of time spent trading compared to working a salaried job and, naturally, how much money you make.
But there is no set concrete guideline, and so you will have to wait and see how the HMRC considers your trading or investing as part of their diktat on the subject.
Trading vs. investing
The situation is muddied, however, by the distinction between those who trade and those who invest either as a hobby or as a secondary source of income.
The HMRC defines a trader as somebody who actively buys and sells assets in the pursuit of profit. In this case, you may be classed as self-employed and have to pay tax accordingly.
However, an investor is considered somebody that passively holds onto their assets for a longer period of time, and if income is earned in this way, then you might be liable to pay Capital Gains Tax.
If you are considered to be a self-employed trader, you will need to pay income tax on earnings over the £11,500 threshold. Unfortunately, this includes any salary you earn as well, so you are likely to have to make a tax payment in this instance.
However, note that any trading losses you make can be offset against your total income, and that may just help to bring your tax burden down somewhat.
And as an investor?
If HMRC determine you to be an investor, then you may have to budget for a Capital Gains Tax payment.
That will be the case if your profits are above the £11,500 mark, so if you are holding shares or another asset and sell, then this will be taken into consideration. But you don’t have to pay tax on open positions, so even if you have live holdings above that watershed figure, then you will be tax-exempt until you sell.
There are allowable losses that can be taken into consideration, and if these take you under the Capital Gains Tax allowance, then you will not have to pay a penny.
Tax-free investing is also possible by using an ISA. The instruments allow investment up to a set amount each tax year and any profits are tax-free.
Other forms of trading tax
You may not know this, but there can be other forms of taxation linked to your trading.
If you buy and sell shares, you will have to pay tax on your transactions – that’s 0.5% of the cost when buying shares electronically, or when the fee exceeds £1,000 for transactions completed using a stock transfer form.
You will also pay tax depending on the nature of your share trading. This includes buying shares in companies that are registered on UK soil, purchasing ‘option to buy’ shares or those in a foreign firm that is registered in the UK, and on any interest accrued from your investments.
There are some exemptions, and those include shares issued to an employee as part of a workplace scheme, unit trust investments and shares acquired in open-ended investment companies (OEIC).
How to report your trading income
With all of the above in mind, it really does pay to keep track of your earnings accrued through trading and/or investing.
Happily, many brokers will provide automated records of your transactions, and so when the time comes to report your earnings – typically towards the end of the financial year – you won’t have to spend hours slaving away at your computer.
You can create an account at gov.uk if you want to declare your taxable earnings, and while there are horror stories of individuals sweating towards their tax return deadline, the truth is that the process is not as difficult or as daunting as you may have heard!
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.