When buying and selling shares, you can either be an investor or a trader. Establishing if you are an investor or a trader for tax purposes is imperative. In most cases, trading shares and investing in shares are commonly used interchangeably. However, there are a few key differences between the two.
An investor is defined as somebody who buys shares with the intention of holding them for the long-term, usually more than 12 months. A trader, on the other hand, buys and sells shares more frequently with a view to making a profit from short-term price movements.
The main difference between the two is that investors are focused on buying shares in good companies that they think will increase in value over time, while traders are more concerned with timing the market and taking advantage of short-term price movements.
Tax Implications for Share Investors and Share Traders
Once you have established your nature of business, there are key tax treatments that you need to be aware of.
As an investor, it is important to note that the shares are considered assets, which are subjected to capital gains tax (CGT). This means that if you sell your shares for a profit, you will be required to pay CGT on the capital gain.
Income is usually earned from dividends and the costs are factored in at the time of the sale. In the event of a capital loss, you are able to offset this against any capital gains you have made in that financial year or carry it forward to offset against future capital gains.
If shares are held for more then 12 months then the gain will be subject to a 50 % discount.
As a trader, however you the 50 % discount is not available.
How To Determine If You are a Share Trader or Investor
There are a few factors that the ATO will consider when determining if you are a share trader or investor, which include:
-The frequency and quantity of your transactions
-Your intent when buying the shares
-The type of shares you are trading
-The length of time you hold the shares for
-Your expertise in trading shares
If you frequently buy and sell shares, it is more likely that you will be considered a trader. If you buy shares with the intention of holding them for the long term, you will be classified as an investor.
You have the option of reclassifying yourself as a trader or an investor if you wish. However, you need to be aware of the tax implications that this will have. In this case, the nature of the activity needs to have changed. Additionally, you need to have reported your income transactions correctly.
The ATO has also stated that if you are buying shares in companies that are not well known, or are trading in penny stocks, you are more likely to be considered a trader.
If you are considered a share trader, you will be required to pay GST on your shares. If you are considered a share investor, you will be subject to CGT.
The implications of being classified as a share trader or investor are important to understand as they can have a significant impact on your tax liability. If you are unsure about your classification, it is best to seek professional advice.
At Accurate Business & Accounting Services, we have a great team of tax consultants, who will help you with all your tax concerns.