Spread Betting is very popular in the U.K and other European countries and this is mainly because it is tax-free. Spread Betting is easily accessible and it does not require a trader to have a large amount of capital. But like in many investment opportunities that come by, you should read and understand the guidelines that relate to spread betting. This will help you avoid getting taxed when you hadn’t planned on it.
In the United Kingdom where spread betting is very popular, spread betting is generally considered as taking an opportunity rather than you carrying on a trade. The difference between these two is that if you are just taking an opportunity, spread betting is not really your main business. However, if Her Majesty’s Revenue and Customs (HMRC) sees that you are spread betting full-time, you might actually end up paying taxes. Normally, if you are earning money just like any other worker in the country through full time spread betting, you should pay taxes to the government.
Understanding why spread betting is tax-free in many countries
In several countries, particularly the U.K, if you are not spread betting full time, the government gets a hard time trying to determine whether you should be taxed or not. Just as it was stated earlier, every citizen who earns an income has an obligation to pay taxes to the government. Here are the general guidelines that are used by HMRC (click here for complete list);
- The taxpayer placing a spread bet is regarded as not carrying on a trade. This means that they are not taxable on the profits and do not receive any relief on their losses.
- In order to be considered taxable, the spread betting wins must come not only from an opportunity presented by a trade but should arise from the carrying on of that trade. Whether or not a particular spread bet is taxable depends on the terms of the contract and the ‘economic substance’ of what is done. The term economic substance is meant to mean how significant the income from spread betting is to a trader. If the spread betting income is your main income, then you probably need to be paying tax.
Is spread betting different from gambling
Spread betting is a type of speculation where one takes a bet on the price movement of a security. A spread betting broker will quote two prices; the bid price and the ask price. The difference between bid and ask price is called the spread. Investors are supposed to bet whether the price of the underlying security will be lower than the bid or higher than the offer. It is important to note that the investor in spread betting does not own the underlying asset.
On the other hand, gambling can be said to be the wagering of money or something of value on an event with an uncertain outcome. The primary aim of gambling is to win money or material goods. In other words, gambling requires there be a prize, chance and consideration.
So, technically, yes. Spread betting is gambling. This is so because you don’t actually own the underlying asset or stock so ideally, this is not investing. But on the other hand, spread betting can also be classified as trading. It can be put in your overall investment portfolio and classified as a very high-risk investment. In many instances, spread betting analysts will advise traders to risk only 5-10% of their capital.
Spread betting can be used as a form of overall investment strategy. You can use spread betting to bet on an underlying asset going down in the short term that you have a long term holding and you want to protect yourself. This hedging technique is a popular use of the spread betting among veteran investors.
Difference between spread betting and gambling
- Payment of taxes – In gambling, you obliged to pay taxes to the government. In spread betting, you usually don’t pay taxes, as explained above.
- Regulatory bodies are different – In the U.K, spread betting is regulated by the Financial Conduct Authority rather than the U.K Gambling Commission. This is mainly because of the risk of losing even more than the initial capital in spread betting. Spread betting is also protected by the FSCS up to £50,000. The Gambling Commission doesn’t offer such kind of protection.
- Pay-offs – In spread betting, the payoff is based on the accuracy of the wager rather than a simple ‘win or lose’ outcome. A spread can, therefore, lose more money than placed in a stake based on a range of outcomes of the bet. The more the market moves against or for you, the more you lose or gain. In normal gambling, a bettor can’t lose more than their stake money
- Knowledge of the financial market – In spread betting where the markets can be very volatile, you can lose more than your stake. This might mean losing all of your capital in an account because you have leveraged. An in-depth knowledge of the financial market is necessary for a spread bettor. In gambling, one doesn’t need such deep knowledge.