UK Tax on Binary Options explained with HMRC

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Paying Taxes on Binary Options Trading Profits

As a trader who invest in binary options and earn money, taxes should be payed. As mentioned above in the text, paying taxes on binary options should be conducted properly.

To know the exact category under trader’s earning fall into, check policy of taxation in South Africa. It is advised to contact tax adviser to make sure all tax liability are conducted properly.

Taxes on binary options are filed alongside with other earned income in the past year. South African traders first have to determine their overall income per year and afterwards they can see tax bracket they fall into, because for each category, a different tax rate is paid. Traders should also pay attention to tax laws of broker’s country.

To pay taxes, proper documentation has to be delivered. Traders have to fulfill Application for Registration as a Taxpayer.

Our advice is to consult a tax specialist who can assist traders in South Africa to determine tax liability.

*Legal Disclaimer: Binary Options South Africa website is not official site of Tax Administration nor is it authorized to provide any tax advices. This article is for information purposes only and we advise to contact your tax advisor before tax application.

How to report an income?

How can customers report binary options income to tax authorities? This is an issue we encounter often and try to help customers with some basic guidelines for their countries.

However, it is important to note that in many cases we are in the dark as much as customers are, so we try to research as much as possible to deliver some basic information or guidelines that will make the issue of binary options taxation clearer.

Here are some of the most relevant topics:

Binary Options South Africa Is Not a Tax Adviser

Binary Options South Africa does not provide consulting services, nor are we a licensed tax advisor.

We do not employ tax specialists and advisors. Information we provide should be seen as guidelines that can help customers when they are researching the way to pay taxes on their earned income.

Tax Authorities Mostly Undecided on Binary Options Trading

Binary options are becoming a widespread way to take part on the financial market, have fun and educate people about technical and fundamental analysis. In this respect, it is weird that authorities have not devised a more detailed way to understand reporting and taxation of this kind of income.

Regulatory Frameworks Often Set Up Too Late

In a way, this shows the fact that regulators are late to the game, as they are in most other industries.

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Companies are fast to innovate, however, authorities are late with providing an appropriate regulatory framework to strengthen the market.

In some cases they are unaware this needs to be done. in others they don’t have the capacity and in third case they do it and eventually wreck the market by imposing too many restrictions on the very innovation that created the market for the product or service.

Below, we’ll explain in more details about paying taxes on binary options.

From Country To Country, Taxing Binary Options is Different

Different countries have different ways they design their tax policy and different ways they define certain categories in their tax codes. They all have one thing similar – taxes are complicated for the ordinary person.

So when, as in the case with binary options income taxation, the issue of a complicated tax system meets the lack of clear taxation code for this category. For some customers, who do not want to risk fines when withdrawing their profits just because authorities are slow, this is frustrating.

International Tax Treatment When Withdrawing Profits From Binary Trading

Another problem with the tax code is that binary options income is usually withdrawn from the trading account at the broker to the customer’s bank account. This is required and enforced by the international anti-money laundering framework. We have already written about scam in binary options industry here.

For traders who invest and later on profit from binary options traders have to pay taxes on binary options income. Tax treatment differs from country to country.

Broker’s and the banks that they use to conduct their business are in most cases outside of customer’s country of tax residence.

This means that, other than the local tax code, binary options income taxation sometimes can involve specific regulations that arise from international relations and tax treaties (and absence of such treaties. This further complicates everything.

Tax Codes Are Complicated, Find Help If you Are Overwhelmed

Many of the provisions will be triggered depending on the size of the profit (or even losses if the tax code treats them as a form of deductible). This is why customers must decide, depending on the size of the income flow, if they want to take a specialized tax consultant or are they going to try to report the income as part of their own efforts.

How You Report Binary Trading Income Depends on The Definition Your Tax Authority Uses

Much of the confusion stems from the inability of customers, but in some cases, tax authorities themselves, to understand binary options trading in relation to their county’s tax code. Some countries see binary options as a form of gambling income, others see it as a form of capital income. Sometimes one’s own country sees binary options as gambling, however, the country where the broker resides classifies it as capital income.

Some countries define binary options differently, they do not allow one kind of market structure and allow for another one. This also influences how the income earned by trading binary options is going to be defined and taxed.

European Union: Single Market for Many Tax Codes

In the EU, the regulation by CySEC, enforced across the Union through the MIFID directive should make things easier. However, that is not the case. Individual countries and their tax authorities have specified binary options in ways that are not always consistent with the spirit of the single market directives.

While MIFID ensures customers are protected because they can trade with regulated binary options broker even if it is regulated by Cyprus and not by their own country’s authority, incomes are treated as capital gains or gambling, depending on the country in questions.

Also, some countries do not have a clear definition what binary option constitutes in term of the tax code, so they cannot determine if this is capital income or gambling income, or some other form of income.

Make Sure to Be Mindful of Currency Conversion When Stating the Amount for Taxing

Since the trading is conducted online and income will have to be withdrawn from another country, to national bank account traders need to see how that influences the way they report taxes. One practical matter can be simply determining the appropriate exchange rate since taxes are paid in the national currency of the country.

In any case, as usually with taxes, there are many things to consider and traders should make sure they check their country’s tax code for more information or find a specialist consultant to get proper information before risking a fine for improper reporting.

Popularity of Binary Options in South Africa

South Africa is a large country with population close to 55 million people. As regards to participating on financial market, a lot of South Africans are interested to invest on global markets. Latest and widespread industry which is very popular among people in South Africa is binary options trading.

Binary options, also known as digital options, are type of online investment with fixed payout in predetermined period of time.

Trading binary options has only two possible outcomes; will asset price go up or down. South African investors find binary options trading as an excellent way to maximize profit and achieve high payouts. In this article, you can find more information on how to proclaim capital gain in South Africa with regard to online investment in South Africa.

Trading Binary Options in South Africa

An important note for all traders who are interested in this type of online investment, is that binary options are legal in South Africa.

In the last few years, it is visible how binary options trading experienced great popularity and boost among traders in South Africa. There are no regulatory bodies who oversee brokers, available on South African market.

South Africa does not allow domestic binary brokers to offer their services, but offshore brokers, who are registered outside South Africa, are allowed to be present on this market, by offering trading instruments and services to traders in South Africa.

Regulatory Status in South Africa

According to Securities Service Act in 2004, binary options industry is classified as a derivative instrument. In 2007, The Bond Exchange of South Africa (BESA) with its partners developed a platform that allows traders in South Africa to trade with underlying assets on Johannesburg Stock Exchange (JSE).

Shortly after, binary options become a popular field of interest among traders who wanted to earn money with binary options, knowing risk level where it is not possible to lose more money that amount invested at the beginning.

As mentioned above, industry of binary options isn’t currently regulated by Financial Services Board.

Binary options industry is a new market and trading binary options is defined as a right, not as obligation, to invest in trade with fixed payout in future time. Due to low protection of investors, numerous brokers are allowed to offer trading services on South African soil. This is the reason why it is important to trade with reliable binary brokers.

Trading Binary Options with Reliable Brokers

Traders in South Africa are able to trade with brokers, who are recognized as trustworthy in binary industry. Brokers, such as Banc de Binary, Daweda Exchange, 24option, IQ Option and many more try to offer a safe trading platform with a wide selection of trading features and services.

Some of these brokers are regulated by European authorities. With an easy to use platform and quality customer support service, trading binary options can be a simple and profitable journey.

Trading Forex with Reliable Brokers

Also, it is also possible to trade Forex without a complex investment structure. Forex trading represents currency processing which means that traders can invest in Forex trading with basic assets. While other trading options involve different types of assets, Forex deals only with options that focus on currency pairs.

We must note that the forex market provides the potential for profit. In one hand, general trading at the market is simpler and you always know what risk you are trading while forex trading is a variable and there are more things to consider. Also, it’s important to know when to invest, when to quit trading, and how to manage your trade in the meantime. Based on the difference, evaluate what you would like to trade and try a demo account with a forex broker to see all the tools and features you can use.

Forex and Taxes in South Africa

Paying taxes is the obligation of every citizen of every country in the world. South Africa is no different and forex traders have to pay taxes on their profit. This is strongly advisable as otherwise there might be legal consequences. However, the tax system is very complicated and rules vary from case to case so it is impossible to give one unique solution about how much tax you are going to pay as a forex trader.

The best advice is to check with your accountant or tax advisor. You can even reach out to SARS for more info on your status.

The South African Revenue Service known as SARS have the role of taxing and building the tax system and the acquisition of funds that belongs to the nation. Their job, as they say, is linked to the code of behaviors and the principles of SARS which are responsibilities, honesty, integrity, transparency, and trust.

SARS encourages compliance with tax and customs law to ensure that everyone pays their fair share. There is much more information about SARS on their official website and under different FAQ pages listed on their home page. Also, you can contact their customer support and ask for more information regarding any issue with tax related to South Africa trading.

Tax Codes and Tax Rebates

Your tax code is used by your employer or pension provider to work out how much income t ax to take from your pay or pension. The code is worked out by HMRC, who sends it to your employer or pension provider. If your tax code changes, just let us know and we’ll make sure it’s right – it’s all part of our aftercare service.

What does my tax code mean?

Your tax code is made up of some numbers and (usually) a letter. There might be more than one letter, depending on your situation, but basically it breaks down like this:

The numbers show your “personal allowance”. This is how much money you can earn per year without paying tax on it. Right now, yours probably says 1250 – which actually means you can earn £12,500 tax-free.

The letter in your code notes any particular conditions that affect what you can earn before paying tax. If it’s an L, then there’s nothing happening to change your Personal Allowance. You can see a full list of what the letters in your tax code mean but definitely get in touch if you can’t make sense of your code.

Tax code Changes

Will I know if my tax code changes?

Your payslip should have your tax code on it. HMRC may tell your employer to use a higher tax code after you’ve claimed your tax refund because they assume you will be eligible for this tax relief next year – but you may not be. It all depends on how much travel you do.

If your tax code is changed, whether by HMRC or by us, it is important to check on your payslip that your employer is using the correct code.

If your tax code changes then HRMC will have sent a letter to your employer to let them know the code they should be using to work out the amount of tax they take from your wages. If you have overpaid tax then we will be able to sort this out as part of your next refund, of course, but it’s better that you’re not out of pocket for that long.

A higher tax code means you can earn more money before you start paying tax, so you’ll pay less tax over the year. But tax rebates are hardly ever the same two years running, so if you are due a tax rebate and your claim is smaller, you won’t have paid enough tax and you’ll owe money to HMRC. If you need any help on how to check this then give us a call.

Tax Codes Information

Tax Code Changes

What should I do if my tax code changes?

After you’ve claimed a tax refund, HMRC will usually change your tax code. The thing is, they tend to assume that your expenses will stay the same from year to year. In reality, work expenses often change over time. If yours drop, for instance, you could end up owing extra cash to HMRC. Of course, a refund is much better than a tax bill. That’s why we always correct your tax code as part of our aftercare service . If you spot a change in your tax code, just let us know and we’ll take care of it.

Her Majesty’s Treasury plans to move binary options regulations from Gambling Commission to the Financial Conduct Authority.

A recently published draft legislation consultation paper by Her Majesty’s Treasury shows that the UK government is set to switch the regulatory framework for binary options trading from gambling to financial trading. This development is part of a larger trend in the European Union to redefine the legal status of binary options as exemplified by the first Dutch binary options license.

When the UK adopted the EU’s Markets in Financial Instruments Directive (MiFID) rules it did not extend the scope of the British financial regulators to cover binary options. The UK’s approach was in line with how it believed the Committee of European Securities Regulators (“CESR”) analysed the scope of MiFID.

Therefore, under current UK legislation binary options are classified as bets and are supervised by the Gambling Commission rather than the Financial Conduct Authority (FCA). However, different Member States have taken different approaches to this issue. Several European Member States include binary options within the scope of their transposition of MiFID financial instruments.

The UK government now says this creates inconsistencies in approach as to whether firms offering binary options can or cannot passport across the EU. It also means that there is confusion for potential purchasers of binary options about their status and potential inconsistencies in consumer protection for what can be risky products.

Additionally, recent publications by the European Commission on binary options indicate that the Commission believes that certain binary options are within the scope of MiFID. Still, the uncertainty in the EU about the status of binary options have not lead to any specific amendment to MiFID II.

However, HR Treasury says that in the light of the growth of the binary options market and concerns about consumer protection, the British government considers it appropriate to consider their status under the existing directive and revisit the UK’s transposition of this element of MiFID.

Enhancing Certainty

The UK government is now of the view that binary options, where they relate to specific underlyings, are appropriately viewed as MiFID financial instruments. It therefore proposes to bring activity in relation to these instruments within the regulatory perimeter, where they are derivatives in relation to which an investment firm or credit institution is providing or performing investment services and activities on a professional basis.

Such persons providing specific binary options, under the draft amendments, would require authorisation under Financial Services and Markets Act (FSMA) and be regulated by the FCA. Although there are supportive legal considerations in deeming certain binary options ”financial instruments” and specifying them as investments, there are also strong policy reasons for doing so, the goverment says.

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In particular, binary options present similar risks to derivatives and classifying them as financial instruments would ensure that providers would be subject to specific regulatory requirements in relation to organisational and capital requirements and that the range of investor protection rules in MiFID would also apply. It would also mean that the specified binary options are brought within the scope of the market abuse regime.

The British government is seeking comments on its proposed draft legislation to bring certain binary options within the legal framework that covers contract for differences (CFDs) in the UK.

The consequence of this drafting is that a binary option is a financial instrument in circumstances where similar derivative contracts would also be regarded as financial instruments, for example, where the option relates to currencies, stock indices, individual shares, commodity prices and economic statistics. The draft amendment would therefore capture a wide range of binary options.

The UK government is particularly seeking responses in relation to whether this draft legislation raises any problems in relation to scope of what would be captured. For example, a binary option in relation to climatic variables would appear to capture a range of binary options that might not ordinarily be considered to be financial.

Gambling Commission Reaction

A spokesperson for the UK Gambling Commission (UKGC) commented on the development: “For most existing licensed gambling operators this will have little or no impact on their business.

“Binary options account for less than 1% of the Gambling Commission-regulated online gambling market. Operators who offer binary options alongside more traditional betting products will merely find this part of their activity regulated by the FCA.”

However, the spokesperson clarified that binary options firms will not need to apply for a gambling license this year, “This is to avoid relevant operators having to make applications and pay fees that might later prove unnecessary.

“The effect of this is that operators will not, for the time being, require a gambling operating licence to offer binary options, and no application to the Gambling Commission to do so will be necessary until further notice.”

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