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Income tax – spread betting problems in Spain

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Spread betting is a system of trading and speculation in the financial derivatives of financial markets, such as foreign exchange, stock market indices, commodities, individual shares and bonds. These financial markets can be in any country.

Assets are not actually purchased or sold but the ‘gambler’ can win or lose by betting on falling and rising markets.

The bet is made against a deposit that the trader has previously made with the provider of the trading platform. The provider will allow the trader to ‘leverage’ investments by a factor that often exceeds 5 times the amount deposited. This substantially gears up the risk and reward of the investments.

Example: If the trading platform allowed a gearing factor of 5, a deposit of 10.000 US$ could allow the placing of bets of 50.000 US$. If the underlying assets experienced a 10% increase in the value there would would be a ‘win’ of 5.000 US$, a return of 50% of the amount risked by the trader. Of course, the traders deposit capital could be wiped out too!

In some tax systems, betting profits and losses are treated as not being part of the tax system, reputedly on the basis that more gamblers lose than win, so the tax system wins out. In fact, spread betting websites warn that 76% of retail traders lose money.

The tax system in Spain, however, wins every time because:

  • Spread betting winings are treated as general income and taxed at rates up to 48% (depending on which region of Spain), instead of the investment income maximum tax rate of 26% (23% to 31/12/2020).
  • Spread betting losses are not allowed against other income, as would apply, for example, in the case of a loss from selling shares.
  • Spread betting losses cannot be offset against a spouse’s betting wins.
  • Although spread betting losses can be compensated against betting wins for the same person and the same tax year, losses cannot be carried forward to be recovered against wins in future years.

This tax treatment makes spread betting a very bad bet for anyone who is a tax resident in Spain.

There is an alternative to spread betting, CFD trading. A Contract For Difference is a financial contract that pays the difference in the settlement price of an investment between the open and closing trades. Although the way that CFDs work is similar to spread betting, the Spanish tax system treats CFD trading as normal investment, with the following tax treatment:

  • Investment tax rates apply between 19% and 26% (was 23% until 31/12/2020)
  • Losses can be set off against other income in the annual income tax declaration
  • CFD losses can be carried forward against gains in future years and set off against a spouses gains.

So, if you live in Spain always choose CFD trading over spread betting.

Spence Clarke & Co specialises in the provision of Spanish tax, legal, audit and accountancy services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.