Tax Considerations - Day Trade

[flee]

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?

 

[pedalofogus]

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

 

[OllieG]

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.

 

[Julia]

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?

 

[pixel]

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 )

 

[pedalofogus]

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

 

[bellenuit]

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.

 

[pixel]

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

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.

 

[Trembling Hand]

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.

 

[Julia]

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.

 

[Amor_Fati]

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.

 

[Trembling Hand]

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?

 

[Amor_Fati]

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.

 

[tminus]

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?

 

[Trembling Hand]

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!

 

[tminus]

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

 

[Trembling Hand]

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.

 

[tminus]

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

 

[Iggy_Pop]

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??

 

[Julia]

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??

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.