Attractions of spread betting prove alluring to indomitable risk-takers

You might wonder why a form of financial trading for which any profits are exempt from tax is not more popular, but spread betting is not for the faint-hearted.

Demand for financial spread betting services rose after the collapse of the financial markets, at least partly because traders could make money whether the markets were going up or down.

“Yes, it’s just as easy to ‘go short’, meaning sell with the hopes of making money when the price goes down as it is to buy, which clearly has its advantages when markets are plummeting, but there are some other reasons,” says Jasper Lawlor, an analyst for CMC Markets, which offers spread betting as well as other online trading services.

“The cost of trading can be lower with very tight trading spreads, a wide range of markets in one account, the ability to trade on margin and accounts with CMC Markets come with advanced trading software with free charts and news feeds.”

Advocates of spread betting also say its global popularity reflects how investors today are more sophisticated.

“But once you grasp the concept spread betting is arguably a lot easier to get on with than many traditional ways of trading,” says Lawlor.

“The essence of it is that you choose a stake size instead of choosing the number of shares or contracts you wish to buy.”

However, one financial advisor says that spread betting is not particularly popular among Irish investors because it involves leverage and margin calls, which can prove very risky.

He cited a statistic about those new to spread betting known in financial circles as the ‘Triple 90’: 90 per cent of traders lose 90 per cent of their money within the first 90 days of opening their account.

“It’s because leverage wipes them out.”

So is it just for the seasoned traders or those with a huge appetite for risk? “Spread betting attracts risk-takers of all levels of experience and trading is all about being willing to take a risk to get the reward,” said Lawlor.

“The key is to know and understand the potential risks and know the potential reward and decide if the trade, be it with a spread bet or not, is worth it.”

Another issue is that promoting spread betting as a tax-free financial trading activity is misleading as it is essentially gambling. As an activity gambling may fall outside of the scope of capital gains tax (CGT), but not necessarily for income tax.

Andrew Fahy, tax and financial planning director at Investec Wealth and Investment, says: “Irish tax legislation’s definition of ‘trade’ doesn’t provide much insight, so we must look to case law and what are known as ‘the badges of trade’ for guidance. At a very high level, if someone is buying and selling securities pretty frequently and deriving the bulk of their income from such activity, one could argue that this constitutes a ‘trade’ and that an income tax exposure arises.

Lawlor also agrees. “It is a bit misleading and that’s why CMC Markets tends to be more specific. For example, with spread betting we say ‘No capital gains tax or stamp duty’ and make it clear that tax treatment depends on individual circumstances and can change.

“For example, if trading is your main source of income, then it’s taxable as income and of course tax laws can always change.”

A spokeswoman for the Revenue confirmed that spread betting is a gambling activity and is therefore not subject to CGT.

She also confirmed that “incidental profits from gambling activities” are not currently not taxable but added: “If a person is carrying on an activity which has features of trading (frequency of transactions, capital invested, expertise or specialist knowledge) then where a trade is being carried on, the profits are chargeable to income tax.”