Tax treatment in different jurisdictions – US, UK, Australia.

Taxation law is often confusing, and the tax treatment of the global industry of spread betting is no exception.

With spread betting, the operator sets the point spreads or betting spreads. The client decides whether to ‘buy’ at the offer or higher price in the range or ‘sell’ at the bid or lower price. A bet is placed based on the gambler’s prediction of which direction the price is likely to move.

With the size of the payout (or loss) dependent upon the extent of the actual price movement beyond the limits of the betting spreads, it can be seen that there is potential for the outcome to be magnified.

Players take the risk of enjoying substantial gains or suffering equally large losses. Income tax authorities in various countries have not taken a consistent view of the financial outcomes of these spread betting arrangements. Spread betting is conducted on a large and growing number of activities, mainly in the financial and sporting domains.

In the UK, spread betting is regarded as gambling but is regulated mainly through the Financial Services Authority (FSA) rather than the Gambling Commission. At this point, the decision within the UK is that profits generated by spread betting are not subject to income tax or capital gains tax. There is a potential grey area concerning those who derive an income from spread betting and have no other source of income. This group could be liable for income tax on their spread betting winnings however it appears that this situation has never been tested.

Where the US is concerned, the situation regarding much of the financial spread betting marketplace is that US citizens are generally unable to participate, as they legally can’t trade financial derivatives outside the USA. Spread betting is regarded as internet gambling in the USA, and internet gambling is illegal in that country. In terms of the tax treatment of winnings from legal forms of gambling in the USA, the position is that all winnings are regarded as taxable income, although losses and expenses may be accepted as deductions, up to the level of winnings disclosed.

The Australian taxation approach differentiates between financial spread betting and sports spread betting. The ruling is that financial spread betting calls for a degree of skill in predicting the movements of financial markets or indices and is therefore regarded as carrying on a business for commercial purposes and profit making. Financial spread betting, which includes predicting the movements of share and commodity prices or stock indices, is considered to be similar to other forms of trading in financial products. Profits are treated as assessable income and losses are allowed as deductions against assessable income.

Financial spread betting in Australia is governed by the Corporations Act, and not covered by State Gaming and Wagering laws. However, spread betting on sporting events and the like has been determined as recreational gambling, and therefore not subject to taxation legislation.

The message for those considering spread betting is to make sure you understand the income tax arrangements which apply in your own location.