People become retail traders for different reasons. Some start trading because they want alternative income sources, others become retail investors due to the thrill, and many more invest to diversify their portfolios. Whatever your reasons for entering this ecosystem, odds are you’ll want to minimise the amount you pay in taxes. Fortunately, you can use a handful of tips, strategies, and resources to reduce your tax liabilities as a newbie retail investor legally.
Location
One of the most important factors every retail investor must consider when considering taxes is where they live, how they are taxed, and the ramifications for relocating during a tax year. This is why CFD trading has become more popular among UK-based OANDA retail traders in recent years, especially because they get access to non-taxable investments, like spread betting. However, some ill-informed investors may sometimes be caught unprepared by their tax bill. There may be a tax break you’re eligible for when you live in the UK or certain parts of the country.
If you’re willing to invest, you can consider transferring your assets to a different location. Legality varies, but you can pay less tax if your retail assets are domiciled in a territory with more favourable tax regimes. Location matters a lot, but remember that you may not be able to transfer assets offshore as a newbie trader.
Asset Classes
Have you ever heard of fantastic tax breaks, only to realise that these breaks are only available when you invest in select asset classes? You can make the most of asset-specific tax breaks if the assets in question align with your trading strategy. There are a handful of programs in the UK where you get favourable tax perks when you invest in small or medium-sized enterprises. Investing in your favourite pub or local non-league football club can help you make significant returns today and a few months from now, during tax season.
There are a handful of programs that motivate traders to dabble in assets they can trade from home, but these programs often have strict requirements and may not last more than a few years once their goals have been achieved.
Investment Duration
One of the easiest ways people have invested for decades is through “time-bound investments.” This can be as simple as depositing money in an interest-bearing bank account for fixed time frames. Leaving your money for three months can attract a different tax rate than keeping your money for more than twelve months. How long are you willing to keep your money invested for? This is an important question that every prospective investor should ask themselves before diving into the deep end of the market.
Investing for longer periods can present tax breaks in cases where short-term investments do not offer breaks. Similar to the previous example of investing in SMEs, you can access significant tax breaks when you keep your money in these businesses longer. Patience is a virtue that cannot be overstated as a trader; sometimes, you must wait a bit longer to win.
How You Spend Proceeds
You might be shocked to learn that how you spend your proceeds as a CFD trader can impact how much tax you must pay the government. Returning to the example of investing in SMEs within your locality, you can save a lot when you reinvest your proceeds into the same business or other SMEs. The government is interested in keeping as much money as possible within the ecosystem, so it offers tax incentives to investors willing to keep their money in the system, essentially recycling funds across businesses, localities, and industries.
Small Self-administered Scheme (SSAS) is a program where entrepreneurs can manage and contribute towards pension plans for employees and family members. Such plans usually allow up to 12 people to benefit from a single SSAS. Enterprise Investment Schemes (EIS) also offer amazing opportunities for investors to get up to 30% income tax relief on investments made in qualifying businesses. The EIS is one of the best and most transparent ways to record great returns on investments up to £1 million or £2 million in certain circumstances.
Only Legal Routes
There’s nothing wrong with being interested in keeping more of what you earn through legal schemes. Problems arise when you try to game the system or misinterpret what it says for personal gain. There are more than enough opportunities to make money, keep more of it, and spend as you wish without participating in tax fraud or immoral activities.
Tax regimes change more frequently than you might guess, which is why a previously illegal asset class like crypto is now a taxable asset. We may end up living in a future where investors can access tax breaks when they invest in such assets.
Step by Step
The factors discussed in this piece should serve as opportunities, not stumbling blocks. There’s nothing wrong with exploring how to trade and preserve your assets internationally. Investing in the right asset classes for the perfect duration can help make a good trade grade. Reinvesting proceeds into worthwhile businesses, accessing only legal tax break opportunities, forces you to focus on what matters: exchanging assets on the open market.
