subject: Cfds And Tax [print this page] A Contract for Difference (CFD) is a derivative that allows you to speculate on the price movement of underlying securities such as shares, indices and commodities over which the CFD is based without the need to own the instrument.
In simple terms a Contact for Difference is a short term contract between the buyer of the CFD and the CFD provider, with both parties taking an opposite view as to whether the value of the underlying security or instrument over which the CFD is based will increase or decrease in value. CFDs are settled in the form of a cash payment which is calculated as the difference between the opening and closing value of the underlying security or instrument. If the difference is positive the CFD provider pays the difference, and the holder of the CFD will profit. Should the outcome be negative, the holder of the CFD must pay the difference to the CFD provider, and the holder will incur a loss. As CFDs do not have an expiry date CFD positions can be held open indefinitely.
The Australian Taxation Office (ATO) has published a Tax Ruling TR-2005/15 Income tax - tax consequences of financial contracts for differences, relating to the tax treatment of financial Contracts for Difference.
The Tax Ruling states that if you are carrying on a business (or entering into commercial transactions) of buying and selling CFDs for the purpose of profit making, any gains made will be regarded as assessable income and any losses incurred will be an allowable deduction. The deciding factor here is whether you are in fact carrying on a business (or entering into a commercial transaction) the main tests to determine this are outlined below:
The number of transactions you enter into each year (e.g. on a weekly or monthly basis);
The size and scale of your operations;
Whether you are carrying on your activities in a systematic, organised and businesslike manner for the purpose of profit making; and
The degree of skill employed in performing these activities.
If you determine that you are not carrying on a business (or entering into commercial transactions), any gain or loss you would normally make would fall under the Capital Gains Tax (CGT) provisions. As CFDs are regarded as a CGT-asset, any capital gains are treated as assessable income and capital losses can be deducted from any current or future capital gain.
As the ATO views Contracts for Difference as contracts of speculation, in that you are effectively betting that the underlying security or instrument will either increase or decrease in value, it would seem from the ruling that the aforementioned many not apply to CFD transactions. If this is the case, any capital gain or capital loss you make from a financial Contract for Difference entered into for the purpose of recreation by gambling will be disregarded under the CGT gambling exemption provision.
What this all means is that if you have made a $1,000,000 capital gain from a CFD trade and you can persuade the ATO the transaction was entered into for the purpose of recreation by gambling, you will be laughing all the way to the bank. However, if the outcome were a $1,000,000 capital loss, you would lose the ability to offset the capital loss from any current or future capital gains that you may have.
As the ATO views that Contracts for Difference are predominantly entered into for a profit making or gambling purpose, it will would difficult for you to claim a capital loss if you could not prove that you are carrying on a business or entering into commercial transactions.
