Spread betting financial transaction tax proposal

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Lower Limits: Participants are also not subject to the same limits on marginable securities or minimum transaction sizes. While a U. No Charged Commissions: Spread betting companies like to focus on the fact that spread bettors are not charged commissions, but this does not mean that betting is free.

Bettors have to pay the entry spread buying at the ask and selling at the bid and that spread is determined by the company. Depending upon the size of the spread and frequency of trading, bettors may pay more in entry spreads than they would in commissions, but spread betting companies do compete on the tightness of the spreads they offer. Favorable Tax Treatment: Many countries have favorable tax treatment for this type of transaction.

In the United Kingdom, for instance, the profits from spread betting are not subject to capital gains taxes or stamp duties. That benefit is mitigated by the fact that losses are not tax-deductible. Access to Specific Financial Products: It allows participants to access financial products that may not otherwise be available, including stocks listed on foreign exchanges and derivative instruments like futures contracts that may otherwise have substantial minimum investment requirements.

Spread betting got its start in the U. Practically speaking, the only limits on spread betting are what spread betting companies are willing to offer, so spread betting can be done with thousands of individual stocks, stock indices, interest rates, currencies, commodities, and other financial instruments. Tip: Most spread betting companies require spread bettors to use the full available margin.

Spread Betting Limitations Spread betting also carries several significant limitations that participants must consider. The most significant of these limitations is that the bettor never actually owns the underlying asset. While an investor who buys shares with cash and sees the price decline can choose to wait for a recovery in the price, the combination of holding costs and margin requirements can force a spread bettor out of their position before any recovery can take place. Fees There are also numerous fees that apply to spread betting.

First, participants must pay the entry spread, buying at the ask price and selling at the bid price. Spread bettors will also be subject to financing charges also called holding or funding charges if they hold their positions overnight. In essence, this is similar to margin loan interest charges but charged on a daily basis. The amount of the financing charge is calculated as the end-of-day notional position value times the interest rate divided by some brokers will use a different denominator for some instruments, like U.

The amount is then automatically deducted from the account. Brokers often compete on the basis of these fees and it is a good idea for bettor to shop around and consider multiple spread betting companies before starting spread betting. Margin Calls If a spread bet moves against the bettor they may face a margin call. Once the threshold is breached, the bettor must deposit more cash or close some open transactions to raise the equity level back above the minimum threshold.

Most U. Spread betting accounts will also have a pre-specified margin closeout level—if the equity value of the account falls below that level, the broker will automatically start closing out open positions. In the U. There are important differences between spread betting margin calls and typical equity margin calls. While the losses from an individual trade can exceed the initial margin amount, the maximum loss is limited to the value of the account.

Some brokers may offer wider spreads, but offer access to spread betting on financial instruments that other brokers do not offer. Spreads can widen during periods of elevated volatility and can vary between similar instruments in the same class different stocks or indices could have different spreads. CFDs are always settled in cash and there is never a physical delivery of the underlying instrument. Similarities: Leverage: CFDs are similar to spread betting in most respects, including the significant leverage employed.

Law: Both are currently illegal in the United States. Differences: U. Access: Unlike spread betting, many companies that offer spread betting and CFDs will allow residents of the U. While the capital gains from trading CFDs are taxable, the losses are also deductible —something that is not true of spread betting losses. Main advantages of CFDs vs. Main disadvantage for CFDs vs. This article was written by Spent close to 15 years on the Street sell-side, buy-side, equities, bonds ; now a semi-retired raccoon rancher.

That last part isn't entirely true. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The most recent significant development came in the form of a proposal from the German Finance Minister in December , for a revised financial transaction tax directive to be adopted by the 10 remaining states under enhanced cooperation. The revised proposal included an optional exemption for pension schemes and a new system for mutualization of the financial transaction tax revenues.

Proposal In an attempt to move the file forward, the Portuguese presidency of the EU Council recently proposed an inclusive discussion on tax design issues of the financial transaction tax at the EU level. The approach suggested by the presidency would be to allow for gradual implementation of the tax based on the models developed and already tested by France and Italy, where unilateral financial transaction taxes have been introduced. EU Member States not participating in the enhanced cooperation initiative are also asked whether the need to find additional sources for financing the EU recovery effort, coupled with the proposed technical approach to financial transaction tax design, might increase their interest in further work on an inclusive compromise proposal—that is, for an EU-wide financial transaction tax.

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Even though the proposal adheres to the tax principle of a low rate on a broad base, it functions similarly to a gross receipts tax in that it taxes the same activity multiple times, creating tax pyramiding. Small Rate—Big Consequences While a 0. Imagine this happening thousands of times a day. The tax pyramiding quickly adds up. Economic Burden and Distribution The burden of an FTT would primarily fall on the wealthy, as the wealthy hold and trade financial assets the most frequently.

However, the portfolio values of all investors would be decreased by the reduction in asset prices. The U. Chamber of Commerce recently echoed this point, arguing that an FTT would drive up the amount everyday investors pay on their retirement funds.

However, in the long run, investors in the bottom 90 percent will pay some of the incidence of any FTT. This research suggests that the tax is not limited to the top 10 percent of Americans. Inefficient Perhaps most importantly for the economy, an FTT creates significant behavioral distortions.

An FTT would lead to a rise in bid-ask spreads , increasing transaction costs beyond the explicit costs of the tax. Proponents of the tax argue that it would reduce volatility and discourage speculation. However, the existing literature is inconclusive as to whether an FTT would increase or decrease volatility. Executive Summary Editor's Note: The report below is a chapter from the book, "Tackling the tax code: Efficient and equitable ways to raise revenue.

The existing array of taxes have limited revenue potential, can be inefficient, and place an excessive burden on low earners. It is therefore important to examine new potential sources of tax revenues and consider the roles they could play in our overall tax system.

The tax would apply to a broad range of assets—including stocks, bonds, and derivatives—in order to raise as much revenue as possible while also preventing potential distortionary effects. Certain assets such as U.