Share trading and share investing are sometimes used interchangeably. However, they are two distinct classifications with different tax implications. The classification you best into should be guided by your financial goals, investment style, and risk profile. It is important to understand the distinctions between being a share trader versus a share investor as profits, losses, and incurred expenses are treated differently for each status.
Are you a trader or an investor?
A share trader is someone who makes a living from buying and selling shares and conducts activities in a business-like manner. They tend to be focussed on short term gains. A share investor generally buys shares and holds them for the long term for dividend income and capital growth. To be considered as a share trader, the ATO will consider factors such as:
- How you manage your share activities. Do you run it like a business?
- How often you are buying and selling shares. Is it repeated on a regular basis? Share investors generally conduct transactions on a less irregular basis.
- How much capital is invested.
- The volume of shares traded.
- Whether you conduct research or analysis of the share market, and make your buy and sell decisions in a systematic process.
- Whether you undertake training courses or use trading software.
Tax implications for a trader
Whether you trade shares, derivatives, or foreign exchange, it will fall under the same guidelines for tax purposes. Profits made from selling shares are seen as part of running a trading business and is treated as assessable income instead of capital gains.
- Traders can offset realised losses from the year against assessable income such as their salary.
- Shares are regarded as trading stock for your business. Costs of the share and share transactions can be claimed as a tax deduction.
- Traders can claim a deduction for a loss in market value of their shares held at 30 June in each financial year. Share investors can only claim realised losses when the shares are sold.
- Traders do not have the 50% capital gains discount on shares held for more than 12 months.
Tax implications for an investor
The capital gains tax is applicable to share investors who sell shares that are purchased after 20 September 1985.
For investors, the following tax implications are applicable:
- The cost of purchasing shares cannot be deducted against assessable income. It is treated as a capital cost instead.
- Any realised profits from the sale of shares are seen as capital gains and are subject to capital gains tax. Investors might qualify for the 50% capital gains discount if the shares were held for 12 months for longer. In situations where you have purchased shares from the same company at different times, the parcel of shares you bought first will generally be considered as the first to be sold.
- If shares are sold at a loss, it is seen as a capital loss. This can only be offset against capital gains and not against assessable income. If there are no capital gains to be offset against, the capital loss can be carried forward for future offsets.
- Shares held for less than a year are 100% assessable unless there is a capital loss to be offset against. Costs incurred from buying and selling shares are taken into account for capital gains calculations.
- Dividends are included as assessable income, and franking credits offset your payable tax.
- If you purchase shares using funds from an investment loan, you can claim a deduction for interest payments. You can consider prepaying your interest before the end of the financial year to bring forward your deduction. Costs involved setting up the investment loan are also allowable deductions.
Unlike traders, share investors do not have the advantage of being allowed to deduct their losses from their assessable income. Although it is an enticing benefit in situations when share prices fall, share investors cannot simply switch their investor status to suit their needs. This change must involve a change in the way share activities are conducted. You must also have documented evidence to substantiate this claim.
Record keeping essentials
Whether you trade or invest in share, you are required to keep records of all your transactions. Your records should include the following details:
- Share purchase date
- The number of shares purchased
- Purchase and sale prices
- Dividend payments/reinvestment
- Commissions to your broker
- Special events such as share consolidations, buy-backs, and bonus issues.
Keeping good records is essential in reporting for capital gains and income tax obligations. It will help you avoid paying more tax than necessary.
Knowing whether to classify yourself as a share trader or a share investor is important for tax purposes. If you are unsure which classification you belong to, contact Moiler to discuss your situation to avoid costly mistakes later on.
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This document has been prepared by Manoeuvre Wealth, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 11 November 2019.