When you step into the world of the stock market, you might hear about two main approaches: share investing and share trading.
While both involve buying shares in companies, the way you approach these activities and their tax implications can be very different.
Share Investing: A Long-Term Commitment
Share investing is all about the long game. When you invest in shares, you’re usually in it for the long haul, aiming to grow your wealth over time.
Investors often buy shares in companies they believe will increase in value over the years.
They might not sell these shares for a long time, instead holding onto them and possibly benefiting from dividends—a portion of the company’s profits distributed to shareholders.
Tax Treatment for Investors
For tax purposes, the shares you hold as an investor are considered assets. When you eventually sell them, any profit you make is subject to Capital Gains Tax (CGT).
The good news is that if you’ve held the shares for over a year, you might be eligible for a CGT discount.
If you incur a loss when selling, you can use that loss to offset any other capital gains, but you cannot use it to reduce your regular income tax.
Share Trading: A Business-Like Approach
Share trading, on the other hand, is much more active.
Traders buy and sell shares frequently, sometimes within the same day, aiming to make quick profits from short-term price movements.
The goal here is to treat share trading almost like running a business, with the aim of making a profit through regular buying and selling.
Tax Treatment for Traders
If you’re classified as a share trader by the Australian Taxation Office (ATO), your shares are treated as trading stock.
This means that any profit you make from selling shares is considered ordinary income and is taxed accordingly.
On the flip side, any losses or costs you incur can be deducted from your taxable income in the same financial year. This makes the tax implications for traders more immediate and tied to their day-to-day activities.
How to Determine Your Category
The distinction between an investor and a trader isn’t just about how often you trade.
The ATO looks at various factors, including the nature and purpose of your activities, the volume and frequency of your trades, and whether you’re operating in a business-like manner.
For example, a share trader is more likely to have a structured approach, with research, analysis, and regular transactions, whereas an investor may focus on holding shares for long-term growth.
Switching Between the Two
It’s also possible to change from an investor to a trader, or vice versa. However, this shift comes with tax implications.
For instance, if you move from investing to trading, your shares will be reclassified as trading stock, which could trigger a CGT event based on the market value at the time of the switch.
Share Investor or Share Trader
Whether you’re a share investor or a share trader depends largely on your goals, trading frequency, and approach to the stock market.
Understanding these differences is crucial not just for your investment strategy but also for managing your tax obligations.
Consult with your accountant at Oculus to ensure you’re on the right track. We are here to help!
For more detailed information, you can refer to the Australian Taxation Office website.
