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It is a general principle that where an exchange profit or loss arises in the course of trading operations, it is taxable as trading income. Where, however, there is a transaction in foreign exchange connected with an investment of capital, the profit or loss on exchange is not regarded as part of trading operations, but may nonetheless be taken into account for capital gains purposes¹. For example, a forward purchase of foreign currency intended for application on capital account may give rise to a gain or loss within the capital gains tax system. However a mere repayment as between a debtor and the original creditor of a debt incurred in currency terms, which is not in the course of trading operations, nor a chargeable capital gain², is not liable to tax, nor is any profit or loss on exchange arising from it.

Whether a currency transaction does or does not arise in the course of trading should be determined in the light of the particular contractual arrangements. HMRC provides guidance