Day trading is recognized as a business-like activity in Australia. This means that income generated by trading is taxed regardless of where the investments are placed. As a trader, you need to know the tax implications for owning, obtaining, and disposing of shares and investments. This way, you will be able to trade legally and will not have to pay more than you need to.
Do You Meet the ‘Trading’ Criteria?
The Australian Taxation Office (ATO) is the Government’s principal revenue collection agency. Not long ago, the agency didn’t have clear guidelines when it came to classifying trading. Today, regulations are included in the legal database, and a case law approach is taken.
Before traders are affected by income tax, the ATO searches for the following evidence-based information:
- Motivation – Are you engaged in trading in order to make money? If you’ve placed a bet or two just out of interest, then your motivation isn’t profit-based.
- Behavior – Do your actions resemble that of an ‘ordinary’ day trader? Look at the repetition, volume, and frequency of your trading. Usually, the commission looks at how frequently you trade and classifies you as a trader based on that metric.
- Organization – Do you keep all your accounting and other financial information, as well as licenses and trade records? Do you have a valid Australian Business Number (ABN)? Full and accurate records are essential for filing taxes and help support your claims.
- Skill – You need to have analytical skills to recognize trends in the charts, and to handle the math involved in indicators and patterns from technical analysis. Blindly gambling on market movements doesn’t take a lot of skill and doesn’t make you a trader.
- Capital – How much money do you spend in the course of your daily trading activities? Do you have rules for setting some capital aside? The greater capital you invest in your trading activities, the more likely the ATO will classify you as a professional trader.
Trading as an Individual vs. as a Business
Traders operating on their behalf and behalf of business have similar tax and reporting obligations. However, some rules differ between these two entities. The table below illustrates some of these differences:
|Tax rates||You are taxed based on your individual income rate:|
0-$18,200 – Nil$
18,201-$37,000 – 19c for each $1 over $18,200
$37,001-$90,000 – $3,572 plus 32.5c for each $1 over $37,000
$90,001-$180,000 – $20,797 plus 37c for each $1 over $90,000
$180,001 and over – $54,097 plus 45c for each $1 over $180,000
|The full company tax rate is 30%, and the lower company tax rate is 27.5%. Your eligibility for lower rates is based on whether you are a base rate entity or a small business entity.|
|Lodging tax returns||Lodge your tax return by creating a myGov account and linking your account to the ATO.|
Then go to Tax > Lodgments > Income tax.
|Download a PDF of the Company tax return and refer to Company tax return instructions on the https://www.ato.gov.au/ website.|
|Capital gains tax (CGT)||Individual traders may be able to reduce their capital gain through:|
– the discount method
– the indexation method
– 1 or more of the 4 CGT concessions available for small business
|The discount method isn’t available for companies, but it may meet the conditions of the indexation method.|
Trader vs. Investor
For day traders, any profits and losses are treated as business income. However, the rules are slightly different depending on the kind of activity you’re engaged in – trading or investing. The good thing is that it’s not that difficult to distinguish between the two.
As an investor, your main goal is to generate profits over the long term, rather than focusing on short-term gains. The profits usually come from the extended price appreciation of the asset. Also, investing usually involves opening and closing positions irregularly.
Capital gains tax rates depend on how long the seller owned or held the asset. And both gains and losses fall under capital gains tax. 100% of the purchased stock will be assessable if you purchase it within the 12-month period and gain profit from it. This applies unless you have a net loss for the year, in which case you can carry losses back to offset capital gains.
If you hold the stock longer, your gains may be eligible for the 50% exemption. To find out more information about the criteria, you’ll need to check the ATO website.
Unfortunately, there is no way to claim superficial losses on your tax return. However, it can be used to offset capital gains of the same type. Alternatively, you can apply it to your taxable capital gains in any future year.
If you’re engaged in shorter-term trading activities, you will be considered a trader rather than an investor. These strategies maximize the returns in a much tighter time limit.
For day trading, you simply pay tax on your income after any expenses. Similar to investing, the tax also accounts for the losses. A capital loss can be deducted from the rest of the reported taxable income. Bear in mind all short-term trades are regarded as normal taxable income.
Some people consider trading tax in a negative light. But in reality, it’s the most sensible decision to be a law-abiding trader and avoid the high cost of tax evasion. We’ll share information about this later in the article.
Traders who are eligible for trader tax status (TTS) can deduct business expenses, startup costs, and home office costs. Here are some examples of the tax deductions available to share traders:
- The profits from share selling are included in assessable income.
- You can deduct the cost of buying or selling a stock (or exchange-traded fund).
- Traders can also claim technology and equipment deductions. These are considered essential home office running expenses.
- Finally, there are deductions for the cost of a depreciating asset of $300 or more.
As you already know, share investors have slightly different rules, including tax deductions. Here is what you should know about investing tax deductions:
- The taxable capital gain is 50% of the gain, and the allowable capital loss is 50% of the loss. Allowable capital losses can only be deducted from taxable capital gains.
- Net profits fall under the capital gains tax (CGT) rates.
- If you have prepaid expenses, such as Internet fees, seminars, or subscriptions, you can deduct them up to 12 months in advance.
- The purchase price of shares isn’t eligible for tax deductions.
Consequences of Not Paying Trading Tax
Anyone would tell you that filing your activity statements and tax returns on time is incredibly important. Even if you can’t pay, the ATO is likely to be accommodating and take your situation into account.
But if you fail to do so, the agency will:
- Contact you;
- Charge interest on the unpaid amount (around 8%);
- Use any future refunds or credits for repayments;
- Contact an external collection agency;
- Take stronger action (garnishee notices, director penalty notice, direction to pay Super Guarantee Charge).
What Else Should You Know as a Day Trader?
If you’re worried about losing all your profits to taxes, we have some tips for you. Here is what you need to do to simplify the process as much as possible and minimize your payment size.
Certify Your Tax Status
Pay close attention to the Australian tax system guidelines. You want to make sure you’re put in the right category; otherwise, you may be taxed more than is necessary. There are different ways you can contact the appropriate authorities – filing forms online, emailing them, writing to them, or going to the nearest office. Overall, your tax bracket should be calculated appropriately, based on your status.
Remember About Record-Keeping
Always keep detailed records of trades. When developing a trade log, include the following information: entry and exit date, entry price, total sale price (including commission), equity symbol, and the number of shares purchased.
Get Tax and Legal Advice
Even though a financial adviser costs money, the amount of money you end up saving definitely makes up for it. There are many factors and documents to keep track of. A professional will be able to successfully make sense of vast amounts of information and give you informed recommendations about trading tax.
Invest in Tax Software and Calculators
At the end of the tax year, chances are you have hundreds of trades to file. Instead of manually sorting out individual records, switch to using automatic software. Not only does it handle the majority of the paperwork, but it also reduces the chance of mistakes appearing in your calculations. These programs transfer all the required data from your online broker and help you stay on top of your tax obligations.
After trading was officially recognized as a serious practice, it made traders’ lives both easier and more complicated. You can’t engage in day trading activities and not pay taxes. But at the end of the day, tax responsibilities are inevitable, and once you understand them, it becomes manageable. Take our advice and calculate your tax bracket – this way, you’re guaranteed to become a tax-efficient day trader.