Trader or Investor - for Tax purposes

[Tom Katxell]

Hi guys,

I have a couple of questions about tax for trading profits. Could you please help me with this:

1. I have scenario where I am not sure whether I am a trader or a investor from tax perspective. Per my understanding, a trader tax is for someone who has positions open less than 12 months. And to be an investor, one has to hold positions for less than 12 months. Is that correct understanding ? 

2. Further, if the understanding in point 1 is correct, then I am perhaps a trader from tax perspective. However, for one to be trader, one has to also have a detailed business plan, and, log of all trades and the reasons for entering the trade etc. I do not have all these. I simply trade casually and close the position in a few weeks. So does this qualify as a trader ? 

5. When calculating tax, should it be on the net profits ? i.e. if there were 20 trades made of which 15 resulted in profit of 15k and 5 resulted in loss of 5k, would the tax be on the net profit of 10k or would be on the profit from the profitable trades i.e. 15k profit would be taxed ?

6. When I asked about doing taxes with an accountant (did not ask the above questions because of the reason that follows), they said they would need to look at all the trades I made to determine the tax. However, I do not want to disclose the trades to the accountant. In general, does one need to disclose the trades to the accountant or can tax be done with it? If I need, how do I keep the trading strategy to be confidential when doing the tax at the account ? 

Thank you

[Marisawright]

Are you talking about Australian tax or British tax?  Where are you resident for tax purposes?

I have no idea whether this is a reputable website or not, but I found this:

https://www.daytrading.com/taxes/australia

I can understand a tax agent wanting to look at your trades. He has to think of his reputation - what if you made a mistake in your calculations and don't declare all your profits, then he'll be submitting a fraudulent tax return under his name. 

[Ken]

15 hours ago, Tom Katxell said:

Hi guys,

I have a couple of questions about tax for trading profits. Could you please help me with this:

1. I have scenario where I am not sure whether I am a trader or a investor from tax perspective. Per my understanding, a trader tax is for someone who has positions open less than 12 months. And to be an investor, one has to hold positions for less than 12 months. Is that correct understanding ? 

2. Further, if the understanding in point 1 is correct, then I am perhaps a trader from tax perspective. However, for one to be trader, one has to also have a detailed business plan, and, log of all trades and the reasons for entering the trade etc. I do not have all these. I simply trade casually and close the position in a few weeks. So does this qualify as a trader ? 

5. When calculating tax, should it be on the net profits ? i.e. if there were 20 trades made of which 15 resulted in profit of 15k and 5 resulted in loss of 5k, would the tax be on the net profit of 10k or would be on the profit from the profitable trades i.e. 15k profit would be taxed ?

6. When I asked about doing taxes with an accountant (did not ask the above questions because of the reason that follows), they said they would need to look at all the trades I made to determine the tax. However, I do not want to disclose the trades to the accountant. In general, does one need to disclose the trades to the accountant or can tax be done with it? If I need, how do I keep the trading strategy to be confidential when doing the tax at the account ? 

Thank you

I assume that's a typo and you meant that an investor "has to hold positions for more than 12 months"? It's not quite as clear cut as that (investors will get out of positions sooner if they need to) but that's one way to draw a line - most traders keep their positions for a lot less than 12 months though (traditionally day traders closed out their positions every night) so it's not normally difficult to tell which they are. In Australia investors hold on to profitable positions for more than 12 months because that halves their taxable capital gain. Traders don't necessarily have a business plan (other than "make money") and some of the best traders act so intuitively to market movements they might not even be able to explain to themselves why they got out of or into a position when they did.

You would need a log of all your trades (whether you are a trader or investor) or you won't be a able to work out what your profit and taxes due are but your trading platform (or platforms) normally provides that for you. I did used to work as an inhouse accountant with a trading business who had so many trades per day we were able to simply record the daily movement and fees (other than in the few areas of the business where they kept positions over night). Yes, you only need to pay tax on your net profit. Making losses on trades is one of the costs of doing business as a trader.

You shouldn't need to worry about disclosing the trades you've made to your accountant since by the time you are doing your taxes those trading positions will already be out of date. I'm unclear as to why you think your past history of trades would reveal your trading strategy - it wouldn't normally reveal anything other than "if you'd known to buy that 9 months ago and then sell it a week later look how much you could have made". Some of the traders I worked with had their own closely guarded arbitrage formulas that they expected the market to return to and bought and sold based on those. Despite seeing all their trades by the following day (as I said I was inhouse) is was never apparent what those formulas were - but they made a profit most days so we figured they knew what they were doing!