Share traders vs share investors: tax time tips

When it comes to the stock market, there are two main approaches you can take: share trading and share investing. While they might seem like the same thing, the distinction between them may affect how your gains and losses are taxed in Australia. First, let’s clarify what we mean by share trading and share investing.

Share Trading – This usually involves buying and selling shares in a frequent and organised manner to make profits. Essentially, carrying on business activities for the purpose of earning income from buying and selling shares.

Share Investing – This is usually about buying shares with the intention of holding them for a longer term to benefit from them increasing in value and earning dividend income during the holding period. Investors typically hold onto their shares through market ups and downs rather than making short-term profits from buying and selling the shares.

For more information to help you work out whether you are investing or trading in shares, visit the ATO website.

Are you a share trader or share investor?

The ATO considers several factors when determining whether you’re a share trader or investor, including:

 

• Intention – are you buying shares with the intent to make short-term profits or to hold for the long term? If the latter, you’ll likely be viewed as an investor.
• Frequency of transactions – frequent trading activity is usually more indicative of a share trader.
• Business – like behaviour – share traders typically keep detailed records, have a business plan and dedicate significant time to buying and selling shares.

The distinction between share trading and share investing isn’t just about strategy; it can also impact how your profits and losses are taxed. By understanding the differences, you can make sure that you’re paying the right amount of tax. 
 

Tax time for share traders

If you’re considered a share trader, your gains are treated as ordinary income and your losses and related costs are treated as deductible expenses in the year they are derived or incurred:

• Profits – any profits you make from selling shares are usually considered business income and included in your taxable income.
• Dividends – dividends you receive are usually included in your taxable income. If they come with franking credits, the credits can offset your tax liability (meaning they can help reduce the amount of tax you need to pay to the ATO).
• Expenses – you may be able to deduct costs that you’ve incurred in gaining or producing your assessable income, like transaction costs of buying/selling the shares.
• Losses – your trading losses may also be deductible against your business income.

For example, if you make $10,000 in profits from share trading but incur $3,000 in related business expenses, you will report a net business income of $7,000 in your tax return.

Tax time for share investors

For those classified as share investors, the tax treatment is different:

• Capital gains – your shares should be treated as assets and should be subject to capital gains tax (CGT) when you sell them. If you hold the shares for more than 12 months and are an Australian tax resident, you may be eligible for the CGT discount. For qualifying individuals the CGT discount is 50%, which means only half of your capital gain is included in your taxable income.
• Dividends – dividends you receive are included in your taxable income. If they come with franking credits, the credits can offset your tax liability (meaning they can help reduce the amount of tax you need to pay to the ATO).
• Expenses – you can deduct expenses directly related to earning dividends, like interest on loans used to buy shares, from your investment income. Transaction costs of buying/selling shares are not deductible but are taken into account as additional cost base in calculating your capital gain or loss when the shares are sold.

For example, if you sell shares for a $10,000 capital gain and have held them for more than a year, and were eligible for the 50% CGT discount, only $5,000 would be subject to tax. If your FY23/24 marginal tax rate is 32.5% , you would owe $1,625 in tax on the gain.

More details about the different tax treatments between share investors and share traders are available on the ATO website.

Great habits for shareholders

Keep detailed records of all transactions, expenses and income. This helps you substantiate your activities to the ATO.

Ask a pro. Tax rules can be confusing, and a tax professional can help you figure out your specific situation and ensure compliance with ATO guidelines and taxation laws.

Regularly review your trading or investing activities to make sure your tax treatment remains accurate.

^Disclaimer

^{Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.}

^{Commonwealth Securities Limited (CommSec) is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 (Cth) and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. Investing carries risk. Past performance is not an indicator of future performance and should not be relied upon.}

^{For the latest information, check the ATO website or speak to your accountant or financial advisor.}