Capital Gains Tax - Trading as a Business?

[el_ninj0]

I have been wondering what the deal is with capital gains tax when you make enough trades for your trading to be counted as employment.

Could anyone give me some information on this?, anyone that trades full time and does this every year wouldbe extremely helpful.

Most of all, im wanting to know is, how many trades do you have to make in a financial year to be counted as a full time trader, and therefore avoid the capital gains tax; and when you trading is your full time job, do you only pay tax on your profits?; is there any benefits that have to be taken into consideration for any losses you may have made during the financial year?

Thanks in advance.

 

[RichKid]

Re: Capital Gains Tax

I have been wondering what the deal is with capital gains tax when you make enough trades for your trading to be counted as employment.

Could anyone give me some information on this?, anyone that trades full time and does this every year wouldbe extremely helpful.

Most of all, im wanting to know is, how many trades do you have to make in a financial year to be counted as a full time trader, and therefore avoid the capital gains tax; and when you trading is your full time job, do you only pay tax on your profits?; is there any benefits that have to be taken into consideration for any losses you may have made during the financial year?

Thanks in advance.

Sounds like a tough one, best to use the search function to look up old discussions on tax but if you're lukcy someone in the know may help you out. But be careful as you'll really need to see a qualified tax accountant or lawyer to be sure.

 

[rozella]

Re: Capital Gains Tax

Here is a couple of links

“What is carrying on a business of share trading”

“What is the difference between a share trader and a share holder”

rozella

 

[GreatPig]

Re: Capital Gains Tax

do you only pay tax on your profits?

One thing that's not obvious from those links Rozella posted is the issue of trading stock.

As a trading business, the shares you hold are trading stock. The current value of that trading stock has to be calculated at the end of each financial year and tax paid on the difference between that and the value at the end of the previous year. Effectively this means being taxed on unrealised profits.

See attached file. While it talks about using the difference in trading stock value, I think it must mean gains. You'd hardly have to pay tax on the capital component of any increase. For example, if you started the year with nothing and then bought $100K of shares, which were valued at $120K at the end of the year, I think you'd only be taxed on the $20K gain, not the whole $120K value of the portfolio (at least I hope so!).

GP

 

[GreatPig]

Re: Capital Gains Tax

Darn, that edit time limit is so short!

Adding to my previous message, that's assuming the portfolio increases in value during the year. If it goes down in value, that document indicates you can deduct the difference from other income (presumably including realised gains). Not sure what happens though if you don't have enough other income.

Cheers,
GP

 

[kpgduras]

Re: Capital Gains Tax

I have been wondering what the deal is with capital gains tax when you make enough trades for your trading to be counted as employment.

Could anyone give me some information on this?, anyone that trades full time and does this every year wouldbe extremely helpful.

Most of all, im wanting to know is, how many trades do you have to make in a financial year to be counted as a full time trader, and therefore avoid the capital gains tax; and when you trading is your full time job, do you only pay tax on your profits?; is there any benefits that have to be taken into consideration for any losses you may have made during the financial year?

Thanks in advance.

Hi el_ninj0

When I was trading regularily in 2003 I found most of my answers in Tony Compton's book "Shares Derivatives and Taxation". It can be found here:
http://www.tcompton.com/order/books.htm

Regards
kp

 

[rozella]

Re: Capital Gains Tax

One thing that's not obvious from those links Rozella posted is the issue of trading stock.

Quite right, a trader can treat stock similar as does a retail shop.

I am a trader as an individual, & a shareholder as a company, also a shareholder for my super. My wife does the same.

rozella

 

[roofus]

Re: Capital Gains Tax

El- you can do as little as 1 or 2 trades and be deemed to be in the business of share trading. By being deemed a "trader" you wont avoid CGT, you will simply pay tax on profits under the standard income system. (ie 0-6000 free, 6001-21600 x 17% etc).

Thats at the moment, but we'll wait and see what the Supreme Court says about that soon enough.
see here..
http://www.reefcap.com/ubb/Forum61/HTML/000013.html

 

[wipz]

Hi, FYI posted on another CGT thread:

Why on earth would you want to "carry on the business of share trading"?
Your gains will be on revenue account and you will not be entitled to 50% CGT discount - you'd be screwing yourself over.
Capital gains can still be offset by revenue losses, so really I dont know why you'd bother?

Basically I dont see why you would want to avoid the CGT, if you were taxed as though it was profits (on revenue account) the outcome would be exactly the same (worst case senario). The only differences are in LOSS UTILISATION and CGT DISCOUNTS. If you are making profits with your share trading, and your an individual, you will always want your gains to be capital, for these reasons:

1. 50% discount capital gains: If you hold the share for more than 12m you will recieve a 50% discount on your profit. (if your "in the business of trading shares" you will pay tax on 100% on the profit regardless). If the share was held on capital account pre 19 Sept 1985 then you pay NO TAX on disposal.

2. Loss utilisation: If your making huge losses trading shares, then being classed as carrying on a business as a trader will be advantagous because the loss will be on revenue account (as opposed to capital account) and you will beable to claim the losses against other revenue sources (like your wages from your day job). But as I said before, if you were making massive losses why would you still be trading? In most cases you will have capital gains from other shares which you can offset your losses so this arguement can be disregarded. Capital gains can be offset by revenue losses. If you dont utilise your capital losses in one year, just simply carry them forward to the next when you make profits and offset them.

3. Trading expenses: Some may say that being classed as "in the business of trading" can be favourable as you get a deduction for all trading expenses. This is true, however if you claim to hold your share to produce dividend income you can claim these expenses anyway! If you choose not to then your expenses will be included in the cost base of the shares so effectively you still get deduction when you dispose of the share.

This is just my opinion, DYOR.

 

[CanOz]

Most 'traders' won't hold the majority of their positins for 12 months. That said, you need to be making allot of money to get taxed the highest marginal rate for CGT.

Cheers,

 

[Tysonboss1]

I doesn't matter what you are or who you are you only ever get taxed on your profits.

Capital gains tax just means that your profit ( your capital gain ) from the transaction will be added to your income and you will be taxed on it accordingly at your tax rate and if you have held the stock for longer than 12 months then only 50% of the Gain is added as income is added to your income.

Not matter weather you call it capital gains tax or income tax it works out the same, just with capital gains tax there is a chance you will get a 50% discount.