UK Tax on Binary Options explained with HMRC

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UK Tax on Binary Options Explained

Binary options and the UK tax position

  • Do proceeds from binary options trading attract Income Tax and/or Capital Gains Tax liability?
  • Should you declare income from your binary option trades on your tax return?

These and other questions are of concern to novice and experienced traders alike – and we want to help you answer them.

Binaryoptions.co.uk is committed to providing our readers with a definitive and up-to-date picture of binary options trading in the UK. Being clued up on tax is part of this, which is why we’ve made direct enquiries with HMRC to bring you this guide to binary options and UK tax, which can then be used to help you make your own assessment of your trading activity. Links to relevant official guidelines are also included.

Regulation of binary options in the UK, has moved from the UK Gambling Commission, to the Financial Conduct Authority as of 2020. This change is significant, as it may indicate a move from viewing binaries as gambling, into more mainstream financial income. For the current tax year, the advice below remains accurate.

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Tax Basics

HMRC looks at all relevant circumstances to make decisions on tax liability. Here, we’ll outline the position on how the tax authorities tend to regard binary options. However, it is important to note that the correct treatment of any financial transaction or investment comes down to a question of fact:

  • What exactly does the activity consist of?
  • Who is doing it?
  • What is its purpose?
  • What pattern of activity does it form part of?

A transaction with a spread betting firm is a good example of this contextual approach; i.e. speculating on whether an asset will rise or fall. For most individuals, HMRC is likely to consider this activity as betting, which means any profits made from it will be outside the scope of both Income Tax and Capital Gains Tax. However, if that same transaction is carried out for commercial purposes; (for instance, if it is made strategically as a hedge to offset the risks attached to direct investment in a security), any profits that arises from it might be regarded as part of a wider pattern of activity attracting tax liability. For more information on this, see guidance note BIM56880 .

Common terms have very specific meanings when dealing with tax.

You may consider yourself as a ‘trader’, but HMRC will not regard you as such if the activity you are involved in consists solely of speculative transactions. The consequence of purely speculative, gambling or betting activity is that profitable transactions from it do not generally attract a tax charge. However, the potential downside of this from your point of view is that you cannot claim tax relief on losses from this type of activity. For more official guidance on the meaning of ‘trade, see guidance notes BIM20050-20200.

HMRC would also take issue with the description of ‘binary options’ as ‘options’ in the formal sense. An option, in the eyes of HMRC, is an agreed right to buy or sell an underlying asset at a specified price within a specified timeframe. It tends to have an inherent value in itself (which carries CGT implications). If you see any reference to tax treatment of ‘options’, bear in mind that it is not referring to binary options. See CG12300 for the formal definition.

Why are binary options generally treated as a form of gambling for tax purposes?

Binary options present individuals with the opportunity to benefit from fluctuations up or down in, for instance, the price of individual shares or the performance of indices such as stock markets or currency markets. These are derivative products; which means you do not have any ownership in the underlying asset (at no point do you own the share in question, for instance).

In fact, there are only two possible outcomes once the option expires: a fixed amount of money or nothing, depending on which direction you have bet. HMRC will almost always regard this as a form of gambling: a speculative activity that does not in itself give rise to CGT or IT liability.

Could I be regarded as a ‘professional trader’ if binary options are my sole source of income?

Cases that have gone before the courts help to shed light on this. The official guidance note BIM22020 refers to the case of Graham v Green [1925] 9TC309. Here, it was shown that even if a gambler has expertise and has a well-worked ‘system’ in place, this does not mean that they are engaged in a trade.

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A more recent case Hakki v Secretary of State for Work and Pensions [2020] EWCA Civ 530 concerned a professional poker player who made a living through his winnings and who was facing a child maintenance payment order from the Child Support Agency. The Court of Appeal once again confirmed the general principle that gambling is not a trade.

So even if your only source of income is from binary options profits, it seems unlikely at present that profits would be deemed liable for tax. But do not rule it out completely. To adapt an analogy provided in the guidance notes, If, for instance, you receive financial reward for providing customers with binary options trading hints and tips, “whether or not [your] gambling winnings are proceeds of that trade would depend on the facts”.

Do I have to include binary options profits on my tax return?

The answer, in the majority of cases, is likely to be no as it is not classed as income for tax purposes. But as ever with tax, it all depends on the context. Use this general guidance and consider your position carefully. An accountant with specific expertise in gambling and financial trading activities should be able to assess your particular circumstances and provide an opinion on potential liabilities.

Looking for a reliable, reputable platform to conduct your binary options trades? Check out our no-nonsense reviews of the best sites.

Are Binary Options taxable in the UK?

Binary options have become increasingly popular in the UK, so the question if any profits from this trading method are taxable is pretty much inevitable. Most people who are trading binary options look for a definitive answer, but often it isn’t too easy to reach an acceptable conclusion without consulting a tax advisor. In general, money coming through eWallets like Skrill, Neteller and even PayPal are not under tax regulation, hence no tax could be paid, but let’s find out about binary options tax a bit more. Since tax laws vary for many countries we are going to focus particularly on the taxation regulations in the UK.

Current situation with UKGC & FCA

To cut to the chase, binary options are still included in the UK Gambling Commission as long as they are located in the UK. Otherwise, the responsibility of regulation falls under the Financial Conduct Authority. Brokers inside the EU with a CySEC license even have the ability to seek FCA regulation, if they meet the criteria. In march of 2020, the UKGC mentioned in a letter that the government is providing secondary legislation provisions, which will ensure that binary options brokers are supervised by the FCA instead of the Gambling Commission. In all of 2020, they have been pretty much silent about this issue. Although the UKGC has stated that they don’t think it is gambling, binary options are still classified as a form of “betting”.

How does the HM Revenue & Customs decide tax liability?

These are the main points for the correct treatment of any financial transaction or investment, which the tax authorities use to define tax liability:

  • Consistency of activity
  • Who is executing it
  • Purpose of activity
  • Pattern of activity

For the most part, HMRC tends to consider the trading of binary options as betting, which means for any profits made from it, both Income and Capital Gains Tax are not applicable. HMRC will not regard you as a “trader”, as long as the activity you are involved in consists exclusively of speculative transactions. On one side this is positive because it basically means your profits are “tax-free”, however, the disadvantage is that you cannot claim tax relief on any losses made. Even in the case that profits from trading binary options are your sole source of income, it is very unlikely that they would be considered liable for any kind of tax at the present moment.

The future of Binary Options taxation & MiFID II

The MiFID (Markets in Financial Instruments Directive) is an EU law that provides harmonized regulation for investment services. To this day, the UK has not yet categorized binary options as a financial instrument. However, the government has stated that because of the growth of the binary options market and concerns regarding consumer protection, it would make sense to treat them as such. This new classification will come into effect with the implementation of MiFID II on January 3rd, 2020. For the duration of 2020, brokers providing binary options can apply for approval by the FCA.

Conclusion about binary options tax

To resolve the question if binary options are taxable in the UK; we can say that at the present moment and for the rest of 2020, profits made as an individual person will not attract any kind of tax. As mentioned beforehand, this is going to change in January 2020, when MiFID II comes into effect. Binary options will then be classified as a form financial instrument or investment and will be fully regulated by the FCA. This means from 2020 and on, you will have to state your profits when filling the tax return. That may seem like a disadvantage; but your losses can be subtracted from the profit, which will be the final amount you have to declare.

Most notably, brokers in the UK providing binary options services will need clearance from the FCA and it will be very easy to distinguish between those who are trustworthy and those who are not.

UK Tax on Binary Options explained with HMRC

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Tax on Binary Options

Tax on Binary Options

Post by pham » Wed Jan 06, 2020 5:05 pm

Is anyone suitably familiar with trading Binary Options and their tax implications to comment on the below?

Essentially they are a win/lose bet wagered on a financial instrument over a set time period. There is no investment or ownership in the underlying instrument (typically a forex currency pair e.g GBP/USD). One merely wins a set percentage (typically between 60-80%) of the initial wagered amount or loses the entire stake.

Could this be classified as gambling (even more so than UK spreadbetting)?

If someone can make a living doing this as their primary means of ‘income’, will HMRC still view any profits as being taxable?

Have their been any landmark tax cases/rulings as regards either spreadbetting or Binary Options trading?

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