The contract for difference (CFD) is a financial product that is winning over retail investors every day. So long as you take basic precautions, your CFD earnings shouldn’t saddle you with a major tax burden.
What CFDs Are and How They Work
A newer way to invest, CFD trading provides retail investors with bold new ways to achieve profitability. When you purchase a CFD, the seller agrees to pay you the difference between the current cost of an asset and its price upon the contract’s expiration. Depending on the asset’s final price, the buyer might have to pay the seller. With a CFD, you can speculate on price changes for any number of assets.
You can tie a CFD to the price movement of equity stock, precious metal, or index fund. According to the expert voices at Capital.com, “a contract for difference lets you trade with just a fraction of the value of your trade, which is known as trading on margin, or leveraged trading.” To avoid taking on needless risk, limit your leverage as much as you reasonably can.
How CFDs Differ From Stock Shares
Generally speaking, retail investors are most familiar with investing in shares of common stock. With a CFD, you can profit from a share price rally without actually purchasing any shares. This can dramatically lower the cost of investing in popular stocks with the potential for growth.
For example, purchasing a share of Apple stock might set you back more than $100. However, you can buy a CFD for Apple stock with as little as $20. The CFD allows you to be very flexible with your day trading strategy. If you think that a particular share price will fall, you can use a CFD to profit from that decline. This is known as hedging or taking a short position.
Tax Considerations When Investing in CFDs
Before buying financial products like CFDs, it is wise to consider any and all tax implications. Generally, you will have to pay capital gains tax on most investment profits you realize. In rarer circumstances, you may see increased income tax liability. Naturally, tax laws vary from jurisdiction to jurisdiction. If you live in the United Kingdom, for example, you may have to pay stamp duty, a tax on the transference of businesses or property. Stamp duty is currently at historic lows.
Nevertheless, you must take stamp duty into consideration when measuring the viability of various trading positions. Because they are not technically assets, CFDs are exempt from stamp duty. Although CFDs tie in with the movements of asset prices, they are technically no more contracts between buyers and sellers.
Nevertheless, any profits earned through CFD trades are subject to capital gains taxes. If you have questions about tax laws in your region, be sure to consult an accredited accounting professional.
Though it is relatively new,CFD trading is fully safe for the cautious retail investor. With this versatile financial derivative, you can profit from a fast-developing market rally with a limited investment budget.