Being a relatively new trading instrument there was no taxation ruling on CFDs when they arrived in Australia in 2002. Applying existing legislation to Contracts for Difference made them tax free as the closest link was to gambling. Some might assume that CFDs and gambling are closely related the Australian Tax Office did not agree. They fast tracked legislation that addressed tax on CFDs.
Talk To Your Tax Advisor
It is important that you consult your own accountant or tax adviser when it comes to tax time. Everyone’s financial situation is unique and the general guidelines here may not address all aspects of your tax situation. This is a guide to the interpretation of legislation regarding CFDs in Australia.
CFD Profit is Treated as Income
Any profit made when trading CFDs is treated as taxable income, and any losses made reduce taxable income. So the income for tax purposes is the net income calculated by adding up all your profits and taking away all your losses.
Maximise Your Tax Deductions
Any expenses associated with trading CFDs can be tax deductible. This includes costs like internet fees, any interest, brokerage or trading platform charges. These can be claimed to reduce your taxable income.
CFDs and Capital Gains
Holding a CFD position for 12 months or more to claim a capital gains discount is not a useful strategy when trading CFDs. Your gain or loss is treated as income so capital gains tax does not apply. Likewise franking credits on dividends are not received when trading CFDs so these cannot be claimed.
CFD Tax Outside Of Australia
There are a few things to watch if you are outside of Australia as well and once again tax advice from a local accountant is important. In New Zealand it may pay to trade Contracts for Difference (CFDs) through a different entity so you are not classified as a trader by the IRD which could potentially impact your investments. In the UK spread betting remains non taxable, but the penalty for a trader is a wider spread paid on each transaction.
The Last Word On Tax on CFDs
While it is vital for you to know your taxable situation this is not the reason to trade CFDs. It is not a wise investment decision to lose $1 to save 30 cents.
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