Capital Gains Tax explained 2019/20
Now that you’ve downloaded the Trader Tax Guide, you might be wondering how the Capital Gains Tax regime applies when a day trader is deemed to be a private investor. In this factsheet we outline how the Capital Gains Tax (CGT) rules apply.
A day trader deemed to be a private investor must calculate the total gains or losses made on all disposals in a particular tax year. Closing a trade will constitute a disposal for a day trader. The closing of this trade then generating either a gain or a loss.
Calculating gains and losses
The gain or loss on each individual trade or transaction must be computed separately. The gain or loss on each trade is calculated by taking the actual proceeds received and deducting from it the original cost incurred in placing the trade. If costs, such as broker fees, were incurred in opening or closing the trade, these costs will also be deducted from the proceeds to arrive at the total gain or loss for each trade. All gains and losses arising in a particular tax year are then aggregated to arrive at the total gain or loss.
CGT Annual exemption and Tax rates
Each year an annual exemption is available which will reduce or eliminate the gains chargeable to CGT. For the tax year 2019/20 the annual exemption is £12,000. Where there is an aggregate gain and that gain is above the annual exemption, then the day trader will be liable to CGT on the amount over £12,000. Aggregate gains below the annual exemption will not be taxable.
The two rates of CGT for 2019/20 applicable to chargeable gains arising from day trading are 10% and 20%.
Relief for capital losses are first given against gains made in the same tax year. This means that losses are set off against gains made in that tax year, even if this means that some or all of the annual exemption is wasted. Any losses not used are then carried forward for offset against gains of subsequent years.
In subsequent years, capital losses brought forward from earlier years can be offset against gains of that tax year. Only enough of the carried forward losses needed to reduce the net gains to the annual exemption for that tax year will be used for offset. Any unused losses will be carried forward to future years.
Filing a tax return
Where Capital Gains Tax is payable or there is a capital loss that the day trader wants to carry forward he/she must report this to HMRC.
The day trader must also report to HMRC where total disposal proceeds, that is the total amount received on all their trades throughout 2019/20, is greater than £48,000 i.e. four times the annual exemption.
If the day trader does not usually prepare a tax return or has not received a notice to complete a tax return, then the day trader must notify HMRC before 5 October after the end of the year in which the gains or losses arose. Please refer to the HMRC website below for details of how to report and pay CGT:
The tax return must be submitted by the filing deadline. The filing deadline for electronically submitted returns is 31 January following the end of the tax year. For paper returns the deadline is 31 October following the end of the tax year.
Any CGT due must be paid by 31 January following the end of the tax year.