# Tax Considerations - Day Trade



## flee (4 November 2010)

Hi guys, just a question on how the following situation would be treated for tax purposes.

I bought share X when the market opened for say $1 and sold it a few minutes later at say $1.10 for a profit of $100. 

Then I decide to buy another parcel of share X on the same day at a price of say $1.05, hoping to take advantage of a volatile price and do a quick trade. However, the price tumbles to $1.02 and I sell it off for a loss of $30.

Towards the end of the day, I decide to pick up another parcel of share X at a price of $0.90, and continue to hold this for the time being.

Would the loss of $30 be considered part of a wash sale and ignored by the tax office? Any another tax issues that may arise?


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## pedalofogus (4 November 2010)

Wash sales are only a tax problem if the dominant purpose of the transactions is taxation advantage.  If you did the transaction for a reason other than tax, then wash sale rules wont be enforced.  

Also, if you trade regularly then you would be treated as a share trader rather than share investor, so your shares would generally be bought and sold on revenue account rather than capital account.  So shareholdings would be treated as trading stock rather than investment asset.  Just another tax consideration to think about.

General advice only, not specific tax advice.

Cheers
Pedalofogus


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## OllieG (10 November 2010)

That is true. I am listed as a trader, and it is the bottom line that the tax department is worries about. 

ie: basically you can trade once or a million times in a year, and if at the end of the year, you made 100 grand profit, then that is your taxable income. 

Hope that helps.


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## Julia (10 November 2010)

OllieG said:


> ie: basically you can trade once or a million times in a year, and if at the end of the year, you made 100 grand profit, then that is your taxable income.



How does that determine whether you are a trader or not?
e.g. depending on your capital base you could easily have made $100K in a very few transactions.  
Are you suggesting that the level of your taxable income determines whether you are classified as a trader or not?


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## pixel (11 November 2010)

Julia said:


> How does that determine whether you are a trader or not?
> e.g. depending on your capital base you could easily have made $100K in a very few transactions.
> Are you suggesting that the level of your taxable income determines whether you are classified as a trader or not?




No, Julia: It's the  other way around.

Depending on your trading behaviour - for rules see ATO website, e.g. this article - you are classified either as a trader or a casual investor. 
If you are classed as a trader, all your share purchases and holdings are considered trading stock, and you only realise a profit or loss when you close the trade. At the end of the Financial Year, you declare your income from the "business of trading shares" and pay lots of taxes if you've been lucky, or the ATO takes pity and allows you to carry the losses forward into next Financial Year.
(My aim is to have to pay $1 Million tax at least once in my life  So far, that magic number has eluded me )


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## pedalofogus (11 November 2010)

Hi Pixel,

Just a question (not trying to pry into your personal income etc).  You mention in your post that you could carry forward the losses from share trading (if they occur).  Just wondering why you would be carrying them forward?  Is it because you feel that you dont pass the Non-Commercial Loss rules (which would allow them to be offset against your other income eg wages) or is it because the share trading is your only source of income.

Reason i ask, my brother has made a fairly substantial loss (approx 80k...which for him is a lot) on a share trading business (and i don't have any concerns about the fact that he is a share trader...he definitely meets the definition).  I believe he can offset the loss of 80k against his Wages (approx 120k) because he passes the 20k assessable income test as part of the NCL rules, and therefore will get a sizeable tax refund.  

But i cant find anything from ATO that says that a share trader can do that.  All the ATO talks about is normal businesses (like farmers, corner store owners, etc)

thanks
pedalofogus


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## bellenuit (11 November 2010)

pixel said:


> No, Julia: It's the  other way around.
> 
> Depending on your trading behaviour - for rules see ATO website, e.g. this article - you are classified either as a trader or a casual investor.




One point I would add.  To be classified as a trader, you must exhibit the characteristics of carrying on a business of share trading as the link you gave explains. But you must also want to be classified as a trader. As far as I understand it, you can decide that you want to remain taxed as an investor, even though you exhibit all the characteristics of someone carrying on the business of share trading. It doesn't work in reverse though. You cannot decide to be taxed as a trader if you do not meet their trading criteria.

Regarding profit, a trader's income may include increases or decreases in the value of the trading stock from year beginning to year end. I don't want to get too complicated, but if a trader owns 1000 BHP shares valued at $40 each at the beginning of the year and has the same 1000 at year end that are now valued at $60, then the trader's income is increased by $20,000 due to the valuation increase. It gets complicated because you can also deem how your trading stock is to be valued at year end: at cost, at market or the lower of the two.


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## pixel (11 November 2010)

pedalofogus said:


> Hi Pixel,
> 
> Just a question (not trying to pry into your personal income etc).  You mention in your post that you could carry forward the losses from share trading (if they occur).  Just wondering why you would be carrying them forward?  Is it because you feel that you dont pass the Non-Commercial Loss rules (which would allow them to be offset against your other income eg wages) or is it because the share trading is your only source of income.
> 
> ...




Hi pedalofogus

If you trading is classed as a business, the same rules apply as for corner shops and any other businesses. Provided you follow your business rules, keep proper records, and satisfy the ATO that you're fair dinkum, your losses are carried over into the next year, and you don't pay tax until the profits exceed any accumulated losses. Which is, of course, reason enough to carry losses forward 

And you're correct that, apart from selling a few little programs and T/A tuition, trading for profit is my main source of income.

As I'm not a certified Accountant, I can't give you any details and ramifications that might apply in your brother's case; but I know for a fact that I only started to pay income tax on my trading business the year I had recouped first years' losses arising from setup costs and a few "unlucky" trades where I had listened to funnymental arguments rather than following technicals showing in my charts.


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## Trembling Hand (11 November 2010)

Guys this isn't true about trading losses. 

1. you cannot offset bussiness losses *against *wage income. (only neg geared prop !!  )

2. Unless you passed 1 of the 5 (Ithink its 5) rules like being profitable in 2 of 5 prior years, Use a premises for business worth more than $500,000. Have a business income graeter than 20,000 etc.


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## Julia (11 November 2010)

pixel said:


> No, Julia: It's the  other way around.
> 
> Depending on your trading behaviour - for rules see ATO website, e.g. this article - you are classified either as a trader or a casual investor.



As I thought.  Thanks, Pixel.  Ollie G's post, to which I was directing the question, created a different impression.


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## Amor_Fati (11 November 2010)

Trembling Hand said:


> Guys this isn't true about trading losses.
> 
> 1. you cannot offset bussiness losses *against *wage income. (only neg geared prop !!  )
> 
> 2. Unless you passed 1 of the 5 (Ithink its 5) rules like being profitable in 2 of 5 prior years, Use a premises for business worth more than $500,000. Have a business income graeter than 20,000 etc.




Hi TH,

I know it's probably not relevant for you, but if you ever have a bad year eek the Assessable Income test you mentioned only requires over $20,000 in assessable income (IE sales) which is very likely for even a small trader.

So if during the year you purchased $30,000 of shares and sold $22,000, the loss of $8,000 would be deductible (assuming you are a 'trader').

I would encourage anyone with any uncertainties to see a good accountant.


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## Trembling Hand (11 November 2010)

Amor_Fati yeah I guess thats it. $20,000 aint much to rack up in this biz even for the smallest of punters.

Though considering how testy the ATO has been with people calling themselves "traders" I would be very careful. ie get real advice.

Are you an accountant? That is correct that biz losses, Non-commercial losses, cannot be used to reduce PAYE income, wages income, but must be deferred to offset future business income?


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## Amor_Fati (12 November 2010)

I wouldn't hold myself out to be an accountant.

By passing one of the five tests the loss is deductible against any income, be it salary, interest, dividend whatever. It is only carried forward (deferred) if none of the tests are satisfied. There are a few other considerations which anyone can read about here

I agree the bigger issue is probably whther people are entitled to describe their activities as 'trading', because if it is not then the loss is capital and can only offset capital gains. 

Also again, agree that anyone with any doubts should see a good accountant.


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## tminus (12 November 2010)

Amor_Fati said:


> I agree the bigger issue is probably whther people are entitled to describe their activities as 'trading', because if it is not then the loss is capital and can only offset capital gains.



So according to that you can claim books and software as capital losses even if you were just paper trading to acquire knowledge and experience?


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## Trembling Hand (12 November 2010)

tminus said:


> So according to that you can claim books and software as capital losses even if you were just *paper trading* to acquire knowledge and experience?




No!


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## tminus (13 November 2010)

What about claiming the market was too volatile to invest so you were educating yourself?


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## Trembling Hand (13 November 2010)

tminus said:


> What about claiming the market was too volatile to invest so you were educating yourself?




Yeah. I just bought a new push bike for $10,000 and going to claim that as equipment expense for being a professional cyclist. I haven't raced in a professional event yet. In fact I haven't made a cent yet or done anything to actually earn a cent as a pro cyclist as I'm still educating myself.


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## tminus (13 November 2010)

Good point, but at least a bike has other uses.


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## Iggy_Pop (13 January 2011)

I have one question on taxation as a shareholder - 

If I buy a parcel of shares, shares increase 100%, and then I sell 50% and this occurs within one financial year. My capital situation is fundamentaly the same but I now own 50% of the original parcel for no capital expenditure. 

Am I as a shareholder obliged to pay capital gains tax on the shares sold?

My understanding is I have no capital gain, and would not be obliged to pay capital gain until I sold some more of the shares which I have left??


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## Julia (13 January 2011)

Iggy_Pop said:


> I have one question on taxation as a shareholder -
> 
> If I buy a parcel of shares, shares increase 100%, and then I sell 50% and this occurs within one financial year. My capital situation is fundamentaly the same but I now own 50% of the original parcel for no capital expenditure.
> 
> ...



 Your tax return is based on what has happened during the preceding financial year.

Therefore, if you have made a capital gain on the sale of shares you will pay the appropriate level of tax on it, remembering that if you have held the shares for more than 12 months there's a 50% concession on the CGT.

It's irrelevant that you still hold some of those shares.  The Tax Office is only interested in the fact that you bought x number of shares at $X and sold then for $XPlus.


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## Iggy_Pop (13 January 2011)

Thanks Julia, I thought this may be the case. Looks like I need to hold for 12 months as the best option, providing the share gain remains.


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## bellenuit (15 January 2011)

Iggy_Pop said:


> My understanding is I have no capital gain, and would not be obliged to pay capital gain until I sold some more of the shares which I have left??




Forget about the cost of the parcel compared to the cost of the portion sold. You split the parcel into two amounts, those you have retained and those you have sold and allocate transactions costs proportionately. You then work out the capital gain on the portion you have sold compared to the acquisition costs of the portion you have sold (not the acquisition costs of the complete parcel). 

So assume you bought 100 shares at $0.90 each and the brokerage (inc GST) was $10 (or $0.10 per share). You sell 60 for $2 each and brokerage (inc GST) is $10.

The 60 you sold realised $110 ($120 - $10 costs).
The cost of those 60 were $60 ($54 + $6 costs).

Your capital gain is $50. As Julia says, if you held for more than a year, you only add 50% of the CG to your income for tax purposes (e.g. $25).

The remaining 40 shares have a cost base of $40 for CGT calculation when they are eventually sold. 

If you sell in one transaction shares that were part of several different parcels when bought, you identify which parcel they come from when determining the cost base. You don't have to follow any FIFO or LIFO rule if it doesn't suit you, so long as your records can adequately identify the source of each share sold. So if you have bought several parcels of the same share at different times and then sell a portion, if you want to reduce tax in the current year you might nominate the most costly as the source used in the sale or if you already have CG losses you may choose the least costly to write off against those losses or combinations thereof depending on what works best for you. Always bear in mind the 1 year rule, as it is usually better to sell those that are older than 1 year to get the 50% discount.


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## 863 (21 January 2011)

With all the complexity of this taxation in mind, does anyone have a good accountant around Brisbane?


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## burglar (21 January 2011)

863 said:


> With all the complexity of this taxation in mind, does anyone have a good accountant around Brisbane?



Hi 863, 
and welcome to ASF. 
I believe a straight answer to your question would constitute financial advice.
Definately a no no at ASF.


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## 863 (21 January 2011)

Ah right, thanks for letting me know


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## ls111 (29 January 2011)

Hi,

I have posted this query on another thread however I think it would be more appropriate to ask it here. Its quite similar to bellenuits example (posted on 15/01/2011).

Here is the scenario:

PARCEL 1. I buy 1000 shares in company AAA at $1. The brokerage is $20

PARCEL 2. I buy a further 2000 shares in AAA at $2. The brokerage is $30

PARCEL 3. I sell 2600 in AAA at $3. The brokerage is $40.

Because my parcels are all different sizes and different prices, I am wondering how to calculate the brokerage after the sale of parcel 3.

From my understanding I have 3 ways to account for this transaction. 

Method 1. Assume I sell 1000 from parcel 1 and 1600 from parcel 2  (FIFO)

Method 2. Assume I sell 2000 from parcel 2 and 600 from parcel 1. (LIFO)

Method 3. Use the average purchase price.

Could someone please confirm if these are 3 ways to do it...and if possible, the mathematical calculations as to how to show the brokerage fee on the transaction?

Thanks Much


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## ishakeel (29 April 2012)




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