Equity Curves and Tax

[Synergy]

It has just dawned on me that I can't remember seeing an equity curve that has included tax - which i find very surprising and raises a number of questions.

It would be nice to be able to ignore tax in the data altogether (pay it from funds outside the trading pool would work), but that's not very realistic.

Obviously tax should be taken from the profit when paid. But should it also be reflected in any calculations relating to either pool size or profit?

Nearly every system performance indicator will be affected once tax is included into the equation. It would nice, but unrealistic to compensate for tax on the sale of each trade - although the equity curve would be smooth, the compounding effect of any growth would be missing.

It's very odd that I have not heard anything about any of this before.

What do others do?

 

[Trembling Hand]

My guess is that few traders have to pay tax

It would be unlikely you need to calculate after each trade unless your traded infrequent. Simplest way would be to take 30 % off any realised profit after cost quarterly for the quarter. Since that's the likely payment you will be making to the tax man.

Thats close to real world. Quarterly instalments @ 30% company tax rate.

 

[tech/a]

or 15% if its in your super and 0% if your retired.

 

[Trembling Hand]

or 15% if its in your super and 0% if your retired.

Or 47% if you have an average paying day job :

 

[sinner]

What do others do?

I track my income (gross=day job payslips + consulting fees which I sometimes earn + trading P/L) in a spreadsheet every fortnight, and on a monthly basis (the fortnight I don't have a payslip) I quarantine the correct amount required to balance in a separate bank account.

There is a separate (but linked to ensure I am quarantining the correct amount post offset) spreadsheet for business expenses, like computers, primary and secondary internet connections, data and news subscriptions, etc. If you want to claim this sort of stuff, you need to be able to prove to the tax-man you are an active trader. Trading plan, high turnover of trades, etc are the criteria they usually want to see.

I do not count the tax-man in my trading expectancy.

What pisses me off is that if at tax return time the tax-man owes me money, he pays the money sans interest. e.g. if I overpaid $200 in tax over the year then this is all the return provides. This year I got a letter from the ATO stating I owe them money for 2008-2009 FY, because I did not declare the interest earned on the account used to quarantine payments for the tax-man!

Assholes!

 

[skc]

Or trade out of Hong Kong where there is no capital gains tax...

 

[nomore4s]

I don't include tax in my equity curve as I'm too lazy to work it all out:.

I just put 50% of my profit into a high interest account at the end of every month and then pay the tax I owe out of that at the end of the year and whatever is left in that account either goes towards home loan/family holiday etc.

 

[SmellyTerror]

Can’t you just stick a formula in Excel that multiplies your change in equity by your tax? Like, (latest cell) minus (first cell of the financial year) minus (capital injection(s)), times (0.30)? That way you’ve got an updating figure of the tax you’ll need to pay, but you can keep all your earnings in your system to compound in the mean time. And if it matters to you, Excel would also happily graph the equity curve with each day’s tax removed (but since it’d be the same line with 30% less gradient, I’m not sure how much it’d be telling you).

I just do that in my head, but I’ve only got three accounts, so it’s not hard to remember how much I had at the start compared with how much I’ve got now.

 

[Trembling Hand]

Guys,

There is something missing from these comments that I have commented on often but strangly few seem to encounter the same problems. That is when carrying on a business, in this case financial instrument trading or share trading, you pay tax quarterly. Not at the end of the year like a wage earner. After your first year of business and submission of your tax return the ATO kick you into the "pay as you go income tax instalment" system. They send you an estimate of the tax you have to pay at the start of the fin year and you have to pay it within 21 days from the end of each quarterly. And you have to adjust it to actual earnings if its substantially over their estimate.


http://www.ato.gov.au/businesses/content.asp?doc=/content/14896.htm

 

[Gringotts Bank]

Even more importantly, slippage, which can make a massive difference to your bottom line with higher frequency systems and low priced stocks. In fact it can render a hugely profitable backtested system "just profitable" after that is taken into account.

But I don't see any point in coding for either slippage or quarterly/annual tax. Just create the smoothest steepest equity curve you can. Then at the end of the year compare it to your actual equity curve and you'll get to see what sort of difference you can expect going forwards.

If using AB, and most other charting platforms, you can easily include commissions and cash interest rate (for when inactive). Also remember to limit your trade size to maybe <5% or <1% of the previous days volume, so that your system isn't buying far more than it might be able to in real life (under settings>portfolio).

I'm pretty much done with systems though. Unless we get some good broker automated platforms, my best day trading system is far too hard to implement manually.

 

[skc]

Guys,

There is something missing from these comments that I have commented on often but strangly few seem to encounter the same problems. That is when carrying on a business, in this case financial instrument trading or share trading, you pay tax quarterly. Not at the end of the year like a wage earner. After your first year of business and submission of your tax return the ATO kick you into the "pay as you go income tax instalment" system. They send you an estimate of the tax you have to pay at the start of the fin year and you have to pay it within 21 days from the end of each quarterly. And you have to adjust it to actual earnings if its substantially over their estimate.


http://www.ato.gov.au/businesses/content.asp?doc=/content/14896.htm

So the trick is to trade under a new entity every financial year. That way you get to compound your gains through 12 months without paying qtrly installments.

You do still have to pay tax at the end of the year however.

Not sure this is legal, btw.

 

[Trembling Hand]

Off Topic now but,

I don't see any point in coding for either slippage or quarterly/annual tax. Just create the smoothest steepest equity curve you can. Then at the end of the year compare it to your actual equity curve and you'll get to see what sort of difference you can expect going forwards.

Wasting a year trading a system to see at the end if it might match expectations or not would I suspect have you running off to the psychologist.

I'm pretty much done with systems though. Unless we get some good broker automated platforms, my best day trading system is far too hard to implement manually.

Who you using Commsux.

Whats wrong with IB & Ninja? Unless you need a bank of servers connected on the same floor as the ASX it can handle a lot of detail/complexity.

 

[Synergy]

I'm pretty much done with systems though. Unless we get some good broker automated platforms, my best day trading system is far too hard to implement manually.

If it's an intra day system I can understand it would be tiring to do manually. Just lengthen the timeframe...

There is something missing from these comments that I have commented on often but strangly few seem to encounter the same problems. That is when carrying on a business, in this case financial instrument trading or share trading, you pay tax quarterly.

Yes, quarterly installments. Make the most of compounding in the first year. Personally I think the quarterly installments for something like trading are a little rough. Especially when people like artists with their inconsistent earnings get to pay annually. I assume it's because of their haphazard earnings...

Rather than deducting tax as I go, I think I will just keep it as accurate as I can and take tax out as it's paid. If I can be bothered I might make a tax corrected curve so it looks a bit neater.

SKC... That is a brilliant idea. I've got a feeling that loophole has probably been closed though.

On the same line of attack though... What if I was trading as an individual one year (requiring quarterly tax) and trading as a company the next (ceasing individual trading)?

 

[Gringotts Bank]

I'd need to have automatic orders like: "only buy if last trade was of volume >x, and only if >x% of my order can be filled", so as to avoid 1) bots triggering my trades with orders of 1 share, and 2) tiny partial fills.

I'd like to use IB but it seems very user un-friendly from what I read on here...and that could well result in a psych appointment. Bell Direct are apparently going to release an automated interface "soon", but I don't know if it will be any good. I really need something like Tradestation for Aussie stocks.

 

[Trembling Hand]

I'd need to have automatic orders like: "only buy if last trade was of volume >x, and only if >x% of my order can be filled", so as to avoid 1) bots triggering my trades with orders of 1 share, and 2) tiny partial fills.

Oh so you need a very simple system. Really thats hardly a complex flitering algo there.

I'd like to use IB but it seems very user un-friendly from what I read on here..

The reason people say its "user un-friendly" is because they want a web screen to place a order on ie they really want a way too expensive Oz Mum & pop broker. Have a look at who likes it. People who need more than rubbish tools for their business.

I really need something like Tradestation for Aussie stocks.

You haven't really looked into anything have you?

 

[Gringotts Bank]

wow. Interesting attitude you have going on there.

 

[Trembling Hand]

wow. Interesting attitude you have going on there.

I'm just saying there's stacks of very good stuff out there if you investigate and you where complaining about what you have. But anyway.......

 

[DDA]

Long time reader, first time poster here.

Just thought I'd add something to Trembling Hand's comments above re: PAYG instalments.

If the ATO assesses your tax on your notional tax on business/investment income as less than $8,000 pa, I believe you can elect to pay an Annual PAYG instalment rather than on a quarterly basis. Just requires a simple phone call to the ATO if you are eligible.

I would happily link, but I need to build my post count. A simple Google search will show results

 

[captain black]

Welcome DDA

Here's the link for anyone interested:

http://www.ato.gov.au/businesses/content.asp?doc=/content/44903.htm&page=2&H2

 

[sinner]

Long time reader, first time poster here.

Just thought I'd add something to Trembling Hand's comments above re: PAYG instalments.

If the ATO assesses your tax on your notional tax on business/investment income as less than $8,000 pa, I believe you can elect to pay an Annual PAYG instalment rather than on a quarterly basis. Just requires a simple phone call to the ATO if you are eligible.

I would happily link, but I need to build my post count. A simple Google search will show results

Hi DDA,

It's my understanding that businesses which voluntarily register for GST can pay annually, as long as the annual gross is under $2 million.

Not to be taken as financial advice, speak to an accountant and get a private ruling for anything you are unsure of.