Contracts for Difference (CFDs) have become popular among Australian traders for their flexibility in speculating on price movements of various assets. But when it comes to taxes, things can get a bit complicated. Understanding how CFDs are taxed in Australia is essential for anyone trading these financial instruments. It helps you plan your trades, manage your finances, and stay on the right side of the tax office. Let’s dive into the details.
Basics of CFDs in Australia
Before we talk about taxes, let’s quickly recap what CFDs are. CFDs are contracts between a trader and a broker. The value of the contract depends on the price change of an underlying asset, like a stock, a commodity such as gold, or an index. When you trade CFDs in Australia, you don’t own the actual asset. Instead, you’re betting on whether the price will go up or down.
Tax Treatment Based on Trading Intent
Revenue vs Capital Gains Tax
In Australia, the way your CFD trading profits are taxed depends mainly on your trading intent. If the Australian Taxation Office (ATO) considers your CFD trading as a business activity to make a profit, then your gains will be treated as revenue and taxed at your marginal income tax rate. This is similar to how your salary or business earnings are taxed.
On the other hand, if your trading is seen as an investment activity, any profits you make might be subject to capital gains tax (CGT). CGT rates are different from income tax rates and can sometimes be more favorable, especially if you hold your positions for more than 12 months.
How the ATO Determines Trading Intent
The ATO looks at several factors to decide if your CFD trading is a business or an investment. If you trade frequently, have a large number of trades, and spend a significant amount of time analyzing and managing your CFD positions, it’s more likely the ATO will consider it a business.
For example, if you’re trading CFDs on multiple assets every day, have a dedicated trading workspace at home, and follow market news closely to make trading decisions, these are signs that your trading might be treated as a business.
On the contrary, if you make only a few CFD trades a year, and do it more like a long-term investment, perhaps following the advice of a financial advisor, it’s more likely to be seen as an investment activity for tax purposes.
Capital Gains Tax (CGT) on CFDs
Calculating CGT
When it comes to CGT on CFDs, the basic idea is to calculate the difference between the price at which you close your position (the capital proceeds) and the cost base of your position. The cost base includes the amount you paid to open the position, plus any fees like brokerage fees and platform fees.
Let’s say you open a CFD position on a stock for 10,000 and pay 100 in brokerage fees. The cost base is 10,100. Later, you close the position for 12,000. Your capital gain is 12,000 – 10,100 = $1,900. This amount might be subject to CGT.
Discounts and Exemptions
If you hold your CFD position for more than 12 months, you might be eligible for a 50% CGT discount. Using the example above, if you held the position for over a year, only half of the 1,900 gain, which is 950, would be included in your assessable income for CGT purposes.
There are also some exemptions. For instance, if your total capital gains and losses for the year are less than your total capital losses carried forward from previous years, you may not have to pay CGT.
Income Tax on CFDs as Business Income
Reporting as Business Income
If the ATO classifies your CFD trading as a business, you need to report all your trading profits as business income. This means including them in your annual tax return under the relevant business income section.
You’ll also need to keep detailed records of all your trades, including the date of opening and closing positions, the amount of money involved, and any fees paid. These records are important for the ATO to verify your income and ensure you’re paying the right amount of tax.
Deductible Expenses
As a CFD trader treated as a business, you can claim certain expenses as deductions to reduce your taxable income. Brokerage fees, platform fees, and even the cost of subscribing to financial news services that you use for trading are examples of deductible expenses.
Let’s say your total trading income for the year is 20,000, but you paid 2,000 in brokerage fees and 500 for a financial news subscription. Your taxable income would be 20,000 – (2,000 + 500) = $17,500.
Losses in CFD Trading and Tax
Capital Losses
If you make a loss on your CFD trades considered as an investment (subject to CGT), you can use these capital losses to offset capital gains in the same financial year. If your capital losses are more than your capital gains, you can carry forward the remaining losses to future years and use them to offset future capital gains.
For example, if you have a capital gain of 3,000 from one CFD trade but a capital loss of 5,000 from another, you can offset the gain and carry forward the remaining $2,000 loss to the next year.
Business Losses
When your CFD trading is treated as a business and you make a loss, you can deduct this loss from your other sources of income in the same financial year. If you have a salary income of 50,000 but a business loss of 10,000 from CFD trading, your assessable income would be 50,000 – 10,000 = $40,000.
Tax on Overnight Financing Charges
Deductibility
If you hold a CFD position overnight, you may incur overnight financing charges. In some cases, these charges can be deductible. If your CFD trading is considered a business activity, the overnight financing charges are generally deductible as a business expense.
However, if it’s treated as an investment, the rules are a bit more complex. You might only be able to deduct these charges if they meet certain criteria related to the borrowing costs for investment purposes.
Record Keeping Requirements
Importance of Records
In Australia, proper record keeping is crucial when it comes to CFD trading and taxes. The ATO can ask to see your trading records at any time. Keeping detailed records helps you accurately calculate your taxes and defend your tax position if needed.
What to Record
You should record details of every CFD trade, including the date and time of opening and closing the position, the name of the underlying asset, the quantity traded, the price at which you opened and closed, and any fees paid. It’s also a good idea to keep records of your trading strategy notes, market analysis, and any communication with your broker.
Reporting to the ATO
Using the Right Forms
When it’s time to file your tax return, make sure you use the correct forms. If your CFD trading is a business, you’ll use the business income sections of the tax return forms. For investment-related CFD trading, you’ll report your capital gains or losses in the relevant CGT sections.
Seeking Professional Help
Tax rules for CFDs can be complex, and it’s easy to make mistakes. Many Australian traders choose to seek help from a tax accountant or a financial advisor who is experienced in CFD trading taxes. They can help ensure you’re reporting everything correctly and taking advantage of all the deductions and exemptions you’re eligible for.
Conclusion
In Australia, the tax treatment of CFDs depends on your trading intent, whether it’s seen as a business or an investment activity. Understanding the difference between capital gains tax and income tax, along with rules about losses, deductible expenses, and record keeping, is vital for every CFD trader. While CFDs offer trading opportunities, being aware of the tax implications helps you manage your finances better and avoid any issues with the ATO. If you’re unsure about any aspect of CFD taxation, it’s always a good idea to consult a professional to make sure you’re on the right track.
Related topics:
What is ETF CFD and How Does it Work?
