Tax Advisor Explains: CFD Trading

Today, it is widespread and popular even among retail investors: trading in stocks and structured securities. Contracts for Differences (CFDs) offer an enhanced risk-reward ratio for experienced traders. All of this without actually buying or selling the underlying asset. Many traders are considering conducting their trading activities through a specially established limited liability company (GmbH), as the tax offset options for losses on forward transactions have been tightened. Your tax advisor in Düsseldorf and Oberhausen explains CFD trading from a tax perspective.

How do contracts for difference work?

CFDs are financial products. These derivatives are highly speculative and are therefore only suitable for very well-informed traders. It cannot be denied that the increased opportunities are also associated with increased risks. Despite the high risk, these investments are popular because large trading positions can be opened in the market with little capital outlay. Investors have the opportunity to invest in the price movements of underlying assets. In doing so, they do not need to commit the full capital value of the underlying asset. Only collateral is deposited to cover the risks associated with such financial products. The buyer of CFDs does not hold an equity stake in the company but is the holder of a claim.

The underlying assets used for CFDs are often stocks, ETFs, indices, commodities, and (crypto) currencies. Brokers offering contracts for difference typically also provide the remaining borrowed capital. A “margin call” is issued when the collateral is no longer sufficient. CFDs are traded over-the-counter. Their term is unlimited. Either party may terminate or close them.

The benefits of CFDs are diverse. They serve to hedge against securities price, exchange rate, and interest rate risks. This is possible for both personal and business assets. The legislature’s view is divided. While it considers them speculative in the context of personal assets due to their high leverage, the situation is different for business assets. Here, they are recognized as a hedge for transactions in the ordinary course of business.

How are CFDs classified for tax purposes?

For tax purposes, CFDs are classified as forward contracts. This was clarified in June 2021, although the term is derived from civil law in contrast to spot transactions. It remains unclear whether a CFD must be treated as a single legal relationship for tax purposes. That would be the rule in the case of a forward contract. Otherwise, the CFD would have to be divided into various individual CFD contracts or broken down into its individual product components. Ultimately, a CFD should be considered a single financial product or legal relationship, as it constitutes a relevant entity in its entirety. Even in business assets, only uniform accounting for such structured financial products is considered.

How are CFDs treated for tax purposes, and how are gains determined?

Legal questions arise when CFD trading spans multiple years. A unified treatment of the CFD gives rise to implications regarding the timing of taxation for realized gains within the CFD. Furthermore, the application of special provisions for losses from forward transactions in private assets starting in 2021 is affected. If the CFD is treated as a single financial product, taxation is only permitted at the end of the term. For various reasons, however, this type of taxation is often rejected. A form of cash flow taxation at the CFD level is a viable option. Realized gains in private assets would then be taxed annually.

Determining the profit from contracts for difference proves to be extremely complex, which also complicates the tax treatment. In many cases, specific application questions arise. These questions often lead to different case-specific answers regarding the comparison of tax burdens for CFD trading. This applies to both personal and business assets. It has also become apparent that applying the new regulations for losses from forward transactions in private assets can lead to a massive additional tax burden. This has sparked a trend: Many traders are considering conducting their CFD trading through the business assets of a limited liability company (GmbH) in the future to avoid the additional tax burden.

Your Tax Advisor in Düsseldorf and Oberhausen

If you have further questions regarding taxes, please feel free to contact us. Our experienced tax experts will be happy to assist you. Contact Trimborn. Partner and schedule an appointment.