With an average of $5.1 trillion in daily transactions, the foreign currency market was the largest and most liquid financial market in 2016. Policing this market presents unique challenges because of its magnitude and 24-hour availability; after all, how can you monitor online trading in the UK that is available to anybody, anywhere, at any time? This means the currency exchange market is not governed by a single institution. Instead, it is overseen by several different government and non-government organizations worldwide.
As a result, newbies to the forex market may struggle to understand the exact rules and regulations that apply to them, as these laws vary greatly depending on the trader’s region. With that in mind, this article will guide you through everything you need to know before creating a trading account and entering the foreign currency market. We’ll go through all of the laws and regulations that apply to this complicated and frequently volatile sector.
Taking Command of the Forex Market
As previously stated, the sheer size of the currency market implies that no supranational authority can monitor FX transactions. Instead, several countries have established their own regulating agencies to protect their dealers.
The Financial Conduct Authority (FCA) is a consumer watchdog organization sponsored by UK financial services providers, including forex brokers. The FCA is in charge of licensing and regulating firms in the United Kingdom; they also work closely with the Bank of England to ensure that all forex brokers maintain an ethical trading environment that prioritizes clients’ best interests.
Forex brokers are subject to government regulation
The FCA is entirely responsible for safeguarding customers against unethical and dishonest foreign exchange (FX) brokers due to their prevalence in the UK financial industry as a whole. As a result, all UK-based brokers claiming to be licensed by the Financial Conduct Authority (FCA) are legally required to do so. If the firm cannot demonstrate that it is meeting its responsibilities, the FCA may terminate its license and take disciplinary action against it.
As a result, first-time currency traders should avoid unregulated offshore forex brokers in favor of those authorized by the Financial Conduct Authority (FCA). This protects your cash from fraud, insolvency, and liquidation. Before conducting business with a broker, check the Financial Services Register to establish its legitimacy.
Advantages of Taking Part in a Controlled Market
Because licensed brokers are required to regularly provide paperwork to the regulatory body to guarantee that client and company funds are kept separate at all times, currency traders can be certain that their money is secure while trading with an FCA-regulated forex broker. Also, the FCA ensures that there are limits on how much traders can borrow so that they don’t lose too much money if the markets suddenly go against them.
In addition to the preceding, you can be assured that certified brokers will provide a straightforward service. They will happily assist in ensuring a secure transfer of funds when closing your account. Furthermore, in the event of a problem, you will be covered and compensated by the official regulating body for up to £50,000 under the Financial Services Compensation Scheme (FSCS), allowing you to rest certain that your funds are safe.
The Law and Foreign Exchange Taxation
The widespread excitement surrounding the promise of endless cash and success may lead rookie forex traders to overlook the “legal stuff,” namely the tax implications of their new vocation. When you open a new forex trading account in the UK with a regulated broker, your profits will be divided into one of two categories based on how much money you make:
- If you are a self-employed trader, you will be liable for the same taxes as any other self-employed person in the United Kingdom. See the United Kingdom’s government’s self-employment laws for more information.
- If HMRC concludes that you are a private investor, your profits and losses will be taxed under the capital gains system. Forex traders and those who engage in spread betting and CFDs can avoid paying capital gains tax on their profits until they reach a particular amount since the UK government deems these activities speculative and does not consider their profits taxable. The capital gains tax allowance for the 2022–2023 tax year is £12,850. This means that any profit from the sale of an asset is taxed only up to this amount.
How to Correctly File Your Taxes
Naturally, even if you feel you have done appropriate research, you should always proceed with caution before beginning a career in the currency market due to the speculative nature of tax regulations for forex traders. To ensure you stay within the law and pay the correct amount of tax, act responsibly and seek professional advice. If you are still unsure about your tax situation, contact the HMRC and talk with an expert in day trader taxation for assistance.
Keep thorough records of your trading activities, including the dates of your purchases and sales, your entry and departure locations, the instruments you used, and the prices you paid. Your tax status for the year will be determined by whether you engaged in “speculative,” “investing,” or “self-employed” trading. With this information readily available, you’ll save yourself hours of worry when it comes time to file your tax return at the end of the year.
