02:02 PM, 29 Nov 2023 (AUS EST)   The market is currently open       

CFD Tax Treatment

There is much confusion surrounding Contracts For Difference and how they are taxed. Some say they are highly speculative forms of gambling and therefore not subject to tax. Others say they are similar to other financial derivative products and are treated like any other investment. What does the Australia Tax Office have to say about this?

Contracts For Difference

Before we get too involved with taxes and such, what are CFDs? These are derivatives of an asset. Instead of buying shares, you are buying the future movement of the shares. As an example, stock XYZ is at $10 per share. You put up margin, perhaps only 5% to take up a position. If the share goes up, you receive the full profit of the price move. If the share value drops, you lose this amount as well. You are trading the difference in future share price from todays, thus a Contract For Difference.

Although you do not own the underlying asset in a CFD, you are entitled to the dividends. Also, CFDs will almost perfectly mirror the price of the underlying asset. The two are entwined inseparably.

How Do I Tax My CFD?

There can be three separate scenarios when considering Contracts For Difference.

  1. It is gambling
  2. It is a regular business
  3. It is a capital gains investment

How do you know which of the three categories applies? How are they treated differently? We will defer to the Taxation Ruling 2005 / 15.

My CFD is Gambling

Is the CFD gambling? If you made a lot of money with CFDs it would be great to say it was gambling. This way you would not need to pay any tax under Australian law. But any losses would also be completely your own.

How can you determine if your CFD transactions are gambling? It would seem that if you fit many of the criteria below you might be able to treat your CFD trading as a gambling transaction.

  • You are a recreational gambler
  • You have very little expertise in the stock market
  • You only trade CFDs once in a while
  • This is not a profit-making endeavor or scheme
  • You have no connection to the underlying asset

Be careful though. It would be nasty to find out you really do owe tax if you are merely trying to bend the laws. Also, if you suffer a big loss on CFDs, the ATO is not likely to let you suddenly claim this as a tax deduction.

My CFD is Normal Business

If your CFD trading is a business, then you pay regular income taxes on the money made. Also, you can claim any losses against income. You would get the regular amount of business deductions for the place of business, your computer, the software platform, and so forth.

But is your CFD trading a business? The following might help you to decide.

  • Do you trade CFDs in a systematic and organized way?
  • Do you make frequent trades like a normal business practice?
  • Are you trained and skilled in trading?
  • Are these massive trades, beyond a normal investment plan?
  • What is the skill and relationship of those working with you?

Whether you really are running a commercial business or not is a big question. Normal investing as a side-line venture to save for the future is generally not considered a business. But if this is ‘what you do’ for a living, or the scope of trading CFDs is huge, then likely it is a commercial venture. Also, if you find a way to nab quick profits with no risk, such as arbitrage plays from price imbalances, then this is likely considered a profit-making business as the speculative nature is missing.

My CFD Trading is a Capital Gains Tax Asset

Now this area is a bit confusing. If you are not buying and selling CFDs as commercial business, but it is also not the casual gambling kind, it could be viewed as an ‘asset’ which is taxed as a capital gain or loss.

This is very much a hazy area here so be careful. If you are more than a casual gambler, but less than a CFD trading business, then you will likely fall into the investment area of CFDs where you claim CGT. Of course, the ATO really does have the final say in the matter.

It is interesting that the CFD may be considered a CGT asset in the “s 108-5 of ITAA 1997”. This defines a CGT asset as any kind of property or a legal or equitable right that is not property. It would seem that the CFD is a non-property CGT. If that is true, then why is it sometimes considered gambling and business? Should not all CFD’s be classified as a Capital Gains Tax asset?

What is My CFD and How is it Taxed?

It seems they keep the definition clear enough to collect tax if they so choose, yet foggy enough to hypothetically allow all three forms of tax treatment: business, capital gains investment, or gambling. You will need to analyze your situation and pick the path that suits your trading of CFDs the best.