Simply stated for a general audience, a CFD stands for contract for difference, which can be generally described as an agreement between a CFD provider and a buyer in which the buyer and provider disagree about the future of a security (shares of a stock for example. Basically, the two parties are “betting” about the short term future of a securities performance, and the “loser” pays the difference of the winner. As an example, if a buyer thinks that Apple stock will have a particularly bad day, week, or stretch of weeks, they will bet against Apple and the CFD who hold the position that Apple Stock will do extremely well in coming period of time. If at the end of the time period Apple stock has soared and gained about 83 dollars a share at the end of the contracted period, the buyer owes the CFD provider the difference or the amount the stock increased. In this way, individuals can make money while speculating on the price movement of said derivatives
The ATO (Australian Taxation Office) has a very specific ruling on CFD’s that has one glaring exception that will be covered below. Essentially, it has been ruled that the gains and losses due to the speculation of said shares and derivatives can be assessed as taxable income or as viable tax deductions. If you create a company or derive a primary income that is built on the practice of speculating the price differences of shares and other types of securities, then if you lost money in the bet against Apple you can count it as a potential tax deduction. If you gain money from your speculation however, the money made will be taxable and subject to your typical Capital Gains taxes outlined for most stocks, bonds, and securities.
In order to determine if your activities qualify as a commercial transaction or income, consider the following qualifiers for a potential business dealing or transaction. First, are the activities you are engaging in systematic, for the purpose of making a profit, and organized? Second, are these complicated transactions that require skill and expertise? Third, how many transactions are taking place yearly, monthly, and weekly? Lastly, how large is your operation and is it able to be scaled up?
It is important to note that there is an exception to this rule. If you do NOT adequately fulfill the guidelines given above, and your activities are deemed to be gambling as compared to speculation, then the above taxes don’t apply in either direction. Basically, if you come out on the winning side of the gamble, that money is nontaxable and you can cash in on your winnings without fear of the ATO coming after you. However, if you lose all that money you will suffer the full weight of that loss on your own.
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