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below are some notes I typed up for a query to my accountant, thought i might as well share them here as well....
Can we be both a ‘trader’ and an ‘investor’ for purposes of tax on options and shares?
There isn’t much literature available on this. The ATO website and the Deloitte paper linked from ithe ASX website ;http://www.asx.com.au/documents/products/taxation_of_exchange_traded_options_may_2011.pdf
just explains the difference between the two, without considering the case where he same person does both eg an option trader (who actively trades options short term in conjunction with shares) might also keep some long term shares (which he writes the occasional call on) which he treats completely differently from his short term positions. This would not be an uncommon situation, for a share ‘trader’ as well as an option trader.
If the intention of the law was a person were to be wholly one or the other, which side would then determine how the other was treated? It would be perverse if the fact he trades some options meant that all his other transactions automatically were revenue rather than capital. He could just as well argue that the fact that he had some long term investments meant he was an ‘investor’ and that all his option trades were therefore capital.
The only thing that makes sense is that each individual trade or position should be assessed on it’s merits. If this was the case, one could be both an ‘investor’ and a ‘trader’ on different transactions, even within the same account, depending on the nature and intent at the start of the trade. Clearly though it would make things a lot clearer, though I don’t think it would be essential, if he operated two different accounts for the two streams. The next step, if required, would be to use a different entity to hold the long term stuff
To further muddy the waters, it is not really clear at all whether calls written on what would be obviously long term ‘capital’ shareholdings, are necessarily on the capital account. If the shareholder writes (covered) calls systematically, and with the expectation of profit (rightly or wrongly) from the short option rather than just a hedge, the writing of options in isolation would be closer to ‘trading’ (and therefore on the revenue account) as defined by the Deloitte paper, than hedging.
Generally though, the investor would not regard the written call as a trade in isolation, rather he would, or should, regard it as part of his overall strategy, and be interested only in the return from the overall portfolio rather than just that call.
However , the same paper makes it clear that where a written option results in assignment, the option premium shall form part of the base cost or sale proceeds of the underlying . That is, the whole transaction is viewed as one. If the shares were held on Capital account, therefore the option premium has to be on capital account if the option is assigned. It would be strange (if not impossible to account for) if an option premium could be for the revenue account if not assigned (the option expired worthless or was closed out), but on capital account if assigned. Therefore this taxpayer is going to adopt the stance that if the underlying share was on Capital account, any option position relating to that share is also to be treated as a Capital transaction.
Can we be both a ‘trader’ and an ‘investor’ for purposes of tax on options and shares?
There isn’t much literature available on this. The ATO website and the Deloitte paper linked from ithe ASX website ;http://www.asx.com.au/documents/products/taxation_of_exchange_traded_options_may_2011.pdf
just explains the difference between the two, without considering the case where he same person does both eg an option trader (who actively trades options short term in conjunction with shares) might also keep some long term shares (which he writes the occasional call on) which he treats completely differently from his short term positions. This would not be an uncommon situation, for a share ‘trader’ as well as an option trader.
If the intention of the law was a person were to be wholly one or the other, which side would then determine how the other was treated? It would be perverse if the fact he trades some options meant that all his other transactions automatically were revenue rather than capital. He could just as well argue that the fact that he had some long term investments meant he was an ‘investor’ and that all his option trades were therefore capital.
The only thing that makes sense is that each individual trade or position should be assessed on it’s merits. If this was the case, one could be both an ‘investor’ and a ‘trader’ on different transactions, even within the same account, depending on the nature and intent at the start of the trade. Clearly though it would make things a lot clearer, though I don’t think it would be essential, if he operated two different accounts for the two streams. The next step, if required, would be to use a different entity to hold the long term stuff
To further muddy the waters, it is not really clear at all whether calls written on what would be obviously long term ‘capital’ shareholdings, are necessarily on the capital account. If the shareholder writes (covered) calls systematically, and with the expectation of profit (rightly or wrongly) from the short option rather than just a hedge, the writing of options in isolation would be closer to ‘trading’ (and therefore on the revenue account) as defined by the Deloitte paper, than hedging.
Generally though, the investor would not regard the written call as a trade in isolation, rather he would, or should, regard it as part of his overall strategy, and be interested only in the return from the overall portfolio rather than just that call.
However , the same paper makes it clear that where a written option results in assignment, the option premium shall form part of the base cost or sale proceeds of the underlying . That is, the whole transaction is viewed as one. If the shares were held on Capital account, therefore the option premium has to be on capital account if the option is assigned. It would be strange (if not impossible to account for) if an option premium could be for the revenue account if not assigned (the option expired worthless or was closed out), but on capital account if assigned. Therefore this taxpayer is going to adopt the stance that if the underlying share was on Capital account, any option position relating to that share is also to be treated as a Capital transaction.