The stock exchange has urged the Department of Finance to review the tax treatment of contracts for difference (CFD) after the Revenue said it would impose 1 per cent stamp duty on such trades.

Stockbrokers claim the imposition of the levy will prompt a big reduction in trading in Irish stocks as investors will be more more likely to spend their money elsewhere. They say such a fall- off would reduce the capital gains tax take from the profits investors make on share transactions.

Contracts for difference are an increasingly popular form of derivative instrument that enable an investor to take a position on a stock without owning it. In some estimates, such deals comprise up to 40 per cent of trading on the Irish market. Before Revenue clarified its position in a circular to brokers on St Patrick's Day, these contracts were considered exempt from the stamp duty on share trades.

While Revenue has indicated that it will levy the duty retrospectively with interest and penalties, senior market sources said yesterday that stockbroking firms had received legal advice to the effect that the tax authorities would not be able seek payment in respect of past trades.

This is contrary to Revenue's position, although it has said it will review the period of retrospective liability on a case-by-base basis. Such liabilities would run to many millions of euro and they would fall to stockbrokers' clients in the first instance. However, some brokers fear that firms could be left with liability.

The stock exchange will bring its case to Revenue at a meeting next Monday, which will be attended by officials from the Department of Finance. A spokesman for the department said its officials had no role in interpreting the law on stamp duty but would be available at the meeting "in case any policy issue arises".

The exchange indicated yesterday that it has already contacted the department. A department spokesman said its dialogue with the exchange was "only at official level", when asked whether the exchange had been in touch with Minister for Finance Brian Cowen.

A spokesman for the exchange said: "The Irish Stock Exchange has made and is making representations to the Revenue Commissioners and the Department of Finance on stamp duty as it relates to contracts for difference. The discussions are ongoing."

Top management figures at all the main stockbroking firms discussed their position yesterday at a meeting convened by the exchange. A senior broker said yesterday that the position adopted by the industry was that investors who hold a contract for difference position on a stock for more than 30 days will have to pay the stamp duty.

Revenue has indicated that investors who leverage up their stake - by paying a portion of the cost and borrowing the difference - would have to pay 1 per cent stamp duty in respect of each multiple of the original stake. This would kill the market for contracts for difference, brokers say.