Contracts for Differences (CFDs).
A CFD is a method that enables individuals to trade and invest in an asset by engaging in a contract between themselves and a broker, instead of acquiring the asset directly.
With a “Contract for Difference” – the trader and the broker agree between themselves to replicate market conditions and settle the difference amongst themselves when the position closes.
A Contract for Difference can go in any direction. So you can invest in the possibility of prices going up (a “buy” or “long” order) or down (a “sell” or “short” order), according to what you think is likely to happen.
The main “selling point” , and also the main danger of CFDs,is that they can be used with “Leverage”. For example – with a 20 times leverage you could invest €50 in a CFD – but you would get the returns from 20 times that – ie €1000. You would also risk losing 20 times the loss.
The majority of retail customers who buy CFD products on either an advisory or discretionary basis lose money.
Spread Betting allows you to speculate on the movement of stocks and shares without using a stockbroker. When you “spread bet”, you choose whether the price of a product or financial instrument (such as a share, stock index, currency pair or commodity) is likely to go up or down, and decide how much to bet on it.
The amount you wish to bet per point of movement in price is your stake. If the price moves in your favour, your profit is calculated by multiplying your original stake size by the number of points the share or currency has moved. If it goes against you, your loss will be calculated in the same way.
An example is given later in the article. You need to be aware that Losses can exceed deposits. Spread betting is free of CGT and Stamp Duty .
Taxation of CFD Trading and Spread Betting in Ireland
Capital Gains Tax
All spread trading profits are recognised as the winnings of a bet, and are exempt from Capital Gains Tax .
Profits from Contracts for Difference (CFD) are liable to Capital Gains Tax in Ireland.
Unlike traditional share dealing, there is no stamp duty to pay on spread betting or CFD trades . This is because you don’t take physical ownership of the underlying asset.
Spread Betting and Income Tax
Incidental profits from gambling activities are not subject to Income Tax in Ireland. Therefore – spread betting proceeds are not subject to Income Tax.
In theory – there could be a scenario where someone is deemed to be gambling as a trade or business and they would be liable for income tax.
Revenue has previously said that: –
“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.”
We believe that if someone is working in another job and their income from spread betting is not their main source of income – then it would be very unlikely that Revenue would treat their spread betting as a “trade”.
CFDs and Income Tax
If CFD trading forms part of a business or trade – then any proceeds will be included in the income of the business and they will be charged income tax on their overall business profit. In such a scenario where income tax is charged then the CFDs will not be liable for CGT.
If CFD trading is not part of a business or trade – then as far as we understand it – income tax is not payable on CFD profits.
CFD Trading and Spread Betting in Ireland involves a high risk of losing your money. This content is for educational purposes only and is not investment advice
Where can you trade CFDs in Ireland?
There is risk involved of course – and it is recommended that you start with a demo or dummy account to try things out.
The majority of retail investor accounts lose money when trading CFDs.
Etoro was founded in 2007 and operates in more than 140 countries with over 11 million users. Irish residents will use eToro (Europe) which is regulated by the Cyprus Securities & Exchange Commission. It uses EU passporting rules to allow it to operate across the single market.
Etoro normally requires a minimum deposit of $200. However, they sometimes increase this at very busy times to reduce the number of new customers.
Join Etoro Here
Please be aware that all trading involves risk. 67% of retail investor accounts lose money when trading CFDs with this provider.
Example of CFD possible gains and losses
You believe that Company X will increase in its value over the next week. The current value is €1 per share. You decide to invest in Company X CFDs at €100 with 20 times leverage.
With €100 capital on the line, you buy €2000 worth of CFDs – bought with the 5% capital deposit of €100 plus the 95% leverage of €1900.
The share value of Company X CFDs rises to $1.50.
The profit calculation is (€1.50 x 2000) – (€1 x 2000) + €100. Therefore, the profit portion from the trade is worth (€3000-€2000+$€100)=€1,100. This represents a 1000% gain on the original €100 as a result of a 50% share price increase.
If in the example above – the share price of Company X fell to €0.80 this would be the outcome.
Loss = (€0.80 x 2000) – (€1 x 2000) + €100 = minus €300.
This is a 300% loss on the original €100 as a result of a 20% drop in the share price.
Spread Betting Providers Ireland
IG – IG Europe is based in Germany and is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht and Deutsche Bundesbank.
76% of retail investor accounts lose money when trading spread bets and CFDs with this provider.
79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider.
If you are interested in investing in shares without the added risks and charges involved with CFDs – take a look at our comparison of online stockbrokers in Ireland
Spread Betting Example:
Say the share price of a Company is €3.00 and you think it’s going to increase, and you want to take advantage of that price movement.If you bought 1,000 shares in the traditional way, it would cost you €3000.However, if you placed a spread bet on the equivalent of €3000 worth of shares, you might only be required to pay a 5 per cent margin to open the trade: €150 (€3000 x 5 per cent).If the share price then rose to €4.00: your profit would be €1000 in both cases.
With your spread bet leveraged trade, however, you’ve only had to put down €150 instead of the full €3000.On the other hand, if the share price had dropped to €2 you’d be down €1000 in both cases. The difference being that with your leveraged CFD trade you now need to put up this €1000, as you didn’t when you opened the trade.Spread betting providers will often charge fees for services like holding a position overnight, live data feeds and so on – since these vary by provider, we’ve not included any here.
Revenue – What constitutes a Trade?