Are CFDs taxable in Australia?
The taxation of Contracts for Difference and the question ‘are CFDs Taxable in Australia?’ is a very complex one and is dealt with comprehensively in the ATO Taxation Ruling TR 2005/15. If you want to read the ruling, good luck, it’s quite a decent piece of legalese. I’ve done my best to summarise what I think it means for the average CFD trader in this article. Don’t fall foul of the Tax Office as there can be significant financial repercussions for those that do. If in doubt, please contact a qualified taxation professional. The Tax Practitioners Board (TPB) might be a good place to start.
The ATO ruling on CFDs states, ‘is about the income tax consequences of entering into financial contracts for contracts for difference’. In case you’re not aware, Contracts for difference are derivatives that allow investors and traders to go long or short on the movements in price of an underlying asset, without the ownership of the underlying asset. That’s what this website is about, so I assume you’re in the right place.
Features of Contracts for Difference that are highly relevant to their taxation status include;
- Contracts are typically held for a short period of time, normally in the hours or days and rarely for months;
- Contract for Difference traders are normally more experienced that the average trader or investor;
- The holder of the contract for difference makes a net gain or loss based on the price movement of the underlying asset from the starting time and end time of the asset. It’s possible there may also be fees or interest incurred, normally to do with the length the contract was open.
The ATO’s ruling on Contracts for Difference was as follows;
A gain from a financial contract for difference will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 where the transaction is entered into as ‘an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.’1
A loss from a financial contract for difference will be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997, again where ‘the transaction is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.’ 1
For individual taxpayers, the gain form a financial contract for difference is assessable income under section 15-15 of the ITAA 1997, and a loss an allowable deduction, again under 25-40 of the ITAA 1997. This is when ‘carrying on or carrying out a profit-making undertaking or scheme.’1
If CFDs are entered into for the purposes of recreational gambling, they are not assessesable for the purposes of income tax or capital gains. Be aware that the ATO considers gambling as things like horse racing or lottery tickets; if you are entering into contracts for difference it’s more likely that you behaviour is considered a profit-making undertaking.
To determine whether you are ‘carrying on a business’ when trading CFDs the following factors come into account:
Motivation – Whether you intend to trade for a profit
Behaviour – How frequently, repetitively and what volume do you normally trade?
Organisation – Do you have a registered business name and ABN? Do you keep close record of your trading activities?
Skill – Can you demonstrate that you are not just gambling on the markets.
Capital – How much and how well organised is the amount you are investing into the market each day?
It’s actually quite difficult to prove that you can tick all these boxes, so more that likely you’ll find that your income or losses from CFDs will be assessable under sections 8-1 and 15-15 if the Income Tax Assessment Act 1997. It is possible if you can prove your investment of a Contract for Difference is not for a profit making or gambling purpose that you can claim a Capital Gains Tax event when closing your CFD. To quote directly from the ruling itself, however, this is highly unlikely – ‘Although it is not possible to exclude (as a matter of law) the possibility that a financial contract for differences will be entered into for some purpose that is neither profit-making nor recreational, it is (as a matter of fact) considered to be exceedingly unlikely.’1
Do I need to pay tax on CFDs?
In Australia, yes, you do, most likely as assessable income. In this article I explain this. The only situation in which you would not have to pay tax on Contract for Difference gains (or losses) would be if you were merely gambling, in the sense of betting on horses, which can be very difficult to prove for a trader of any sophistication.
Can you claim CFD losses on tax?
You can claim CFD losses on tax, against your other income. If you are operating as a business trading Contracts for difference, you may need to consider the category of a non-commercial loss’. I explain further in this article.
So what does this all mean for the taxation of my Contracts for Difference?
Basically, Contracts for Difference are dealt with under the revenue parts of your tax return, not under the capital parts of your tax return. To be considered ordinary income as a ‘trader’ you need to jump through a number of hoops as listed in the ‘carrying on a business’ section above. Typically a high number of trades would need to involved, and a business like recording manner.
The benefit of being a business to you might be the ability to apply non-commercial losses to your trading.
If you make a windfall on CFDs in one or two trades you may be able to prove that you are using CFDs as a form of gambling, hence being exempt from income of Capital Gains Tax. However, realistically, this will be very difficult to do if you have any experience in trading, and if you’re serious about Contracts for Difference you should disregards this option.
Ultimately, it’s most likely you are looking to trade CFD’s for a profit, so as a rule of thumb consider that your profits and losses will be assessable as income or deductions, not as Capital Gain or Loss events.The ATO’s ruling of Contracts for Difference as a revenue event in the majority of cases as opposed to a Capital Gains Tax event makes some set when you look at what contracts for difference actually are. They are contracts on the change in price of an underlying asset – you never actually take control of the asset, or ‘capital’ itself like you do in say an share or equities transaction. As such, it doesn’t really make sense that they be regarded as capital transactions. Also, the short term nature of contracts for difference, whose lifetime normally is only hours or a few days, is not really conducive to the world of asset holding and capital gains.
If you are making a profit (or loss) trading Contracts for Difference this year, I highly suggest that you check out the tax office ruling referenced above and also speak to a tax agent or accountant who knows their onions when it comes to Income Tax. As mentioned earlier, for monetary and punitive reasons, it’s wise not to fall foul of the ATO.
Footnote 1: ATO Tax Ruling TR 2005/15 ‘https://www.ato.gov.au/law/view/document?docid=TXR/TR200515/NAT/ATO/00001’