Effectively Retired

Smithlondon asked:

Do you declare your profits from "trading" to the local tax man? In the UK there is no tax on "gambling" as HMRC and case law see it as not carrying on a trade. https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim22017

If you are going to start arguing that traders are not gamblers then that's a slippery slope for tax purposes and a lot more "full timers" will find themselves back working for someone else than those leaving because of the PC charge.

In my opinion each bet placed is a bet. Not one half of a trade regardless of your future intent. A second bet merely closes out an open position for a profit or loss. It doesn't change the nature of the first bet.

While I have sympathy it always amuses me when people get on Twitter and scream at the Betfair help desk when the site goes down saying that they are not "gambling but trading" and can't close out a position. No, you've had a bet. On of the factors you are betting on is that you may be able to close out at a stop loss or profit. But in so doing that doesn't alter the fact that the first thing you did was have a bet.

I'll let James respond to the tax question shortly, but I don't think I have ever argued that traders are not gamblers; only that a trader will close out a position rather than let his bet run to expiry. The outcome for the trader might result in a profit, a loss, or breaking-even. Any time you take a position in a market, you are gambling, which is how the tax authorities see it.

Betfair Pro Trader James responded:

@ Smithlondon - You are going off on a tangent. All trades or bets within sport bookmakers and exchanges are regarded as gambles as far as tax is concerned.

Further, most financial trades are speculative and are therefore gambles but as far as the government is concerned they are financial trades and subject to tax.

I argue the difference between trades and bets in sports on an intellectual level that has nothing to do with tax. I just like to differentiate between trades (bets) that go to expiry and those trades which are closed or hedged ("greened up").

Perhaps it's a sign of James' success or optimism that he doesn't mention "reding up", something I've done on many occasions, and an important part of trading.

"Always try to make your wins as big as possible and your mistakes recoverable" - Laura Harris

Marty questions the bet / trade definition, posing:

If I leave a position to run to expiry then haven't I effectively just 'traded out' at the price implied by the result (i.e. 0 or 1 in probability terms)? What difference does it make to anything what we call it?

It makes little difference as I wrote in my last post:

I think... that there is a clear differentiation between a bet and a trade, but... what matters is if your chosen strategy is profitable or not.

It's hard to disagree that a bet expiring is 'effectively' trading out at 1.00 (or 0.00) but it's akin to dropping dead at work from a heart attack and then arguing (from heaven) that you 'effectively' retired.

Except that you didn't retire - like your bet, you expired!

In response to my previously referenced latest post, James wrote:

Thank you for clarifying that I had little input in today's missive and where I did contribute it was more than adequately referenced.

I must point out though that the neck injury was probably picked up the night before the tennis match whilst sleeping due to arthritic neck vertebrae. The tennis merely exacerbated the injury.

To help (or confound) the bet/trade definition further. In derivatives trading one can leave a position open and take delivery of the oil, the wheat or the cash equivalent (in market futures or stock options) or pay the margin if the position goes against. Alternatively, you can trade out prior to expiry for cash only.

I prefer to keep to strict financial trading definitions. Those who only sports trade/bet tend to grab at financial terminology to sex-up their activities without fully understanding them.

"Scalping" is another such word. Say you are a scalper in the financial markets and you might get a visit from the FSA and the City of London police.

One of my concerns when I first entered the world of futures trading was the horrifying prospect of a consignment of pork bellies (I'm using these here as a pars pro toto for commodities in general) turning up at my front door one day because I forgot to trade out of a position. It never happened of course, but as James made clear, you do have the option of taking delivery. Futures trading was a short-lived interest - rather early on, it dawned on me that perhaps it was unrealistic to suppose that I knew more about pork bellies than the full-time traders I was competing against, a lesson I believe I have shared here in regard to active stock trading.

Moving on, and James concluded his comment with:

And finally... You are far braver than I. Squash is a no-go area for me. Even as a fit twenty-something I could walk into a squash court feeling more than capable of beating an obese female on fifty cigarettes a day and yet step out of the court later, a dishevelled wreck.

Sadly, that was probably my last ever game of squash, but what an ending - holding your 25 year old son to 'effectively' a draw...