Trading Taxes in Australia
Day trading taxes in Australia are murky waters. Without clarity from the Australian Tax Office (ATO), it’s only too easy to fall short of your tax obligations. The penalties for which can be financially crippling. Fortunately, this page is here to turn day trading tax rules and implications in Australia, from grey to black and white.
Tax classifications will be broken down, taxes on profits and losses will be covered, as will instrument specific stipulations. You’ll also hear about the tax benefits that can be utilised by the savvy day trader. Finally, the page will detail how to go about tax preparation, including invaluable tips.
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What Is Your Legal Tax Responsibility?
Day trading tax laws are thousands of pages long, making understanding what you’re liable for complex. Your tax liability will depend on how much you generate and lose throughout the tax year. What you’re trading and what bracket your trading activity falls under will also impact your obligations.
You may find you are exempt from taxes or within your tax-free allowance. However, you could also face up to a 45% tax rate. Whatever your tax liabilities, late payments, short payments, and wrong payments, could all result in hefty fines, depending on how much you owe. There is even the possibility of jail time.
Plus, with over 40% of Australian businesses going bankrupt as an indirect result of government action, the taxman often being a major factor, you simply cannot afford to bury your head in the sand.
Let’s take an in-depth look at Australian day trading tax laws, so you can identify precisely what your tax responsibilities will be.
Trader vs Investor
Taxes on day trading income will vary depending on whether your activity is classed as ‘trading’ or ‘investing’. Fortunately, both are relatively straightforward to get your head around.
If you are an investor you usually buy and sell your assets on an irregular basis. Your aim is not to generate income in the short-term, but to increase your wealth in the long run, from price appreciation.
You will make gains and losses on your activities, which will fall under the capital gains tax regime. If you make a gain from a stock, that you purchased less than 12 months ago, it will be 100% assessable. Unless you have prior or current year capital losses to offset.
However, if you hold the stock for in excess of 12 months you could be eligible for a 50% capital gains tax discount, as long as you meet specific criteria.
If you make a capital loss, this cannot be claimed as a tax deduction. Instead, it can be used to offset capital gains made this current tax year, or you can carry it forward to offset against gains made in future years.
However, this bracket is more concerned with taxes on long-term share trading in Australia, and other assets held for a significant period.
If you’re day trading you hold an asset only for a limited time, so you will fall under the ‘trading’ taxes umbrella.
Taxes for day trading income are paid after expenses, which includes any losses at your personal tax rate. The main rule to be aware of is that any gain you make from trading is considered as normal taxable income. However, any losses can be claimed as tax deductions.
Some believe this focus on paying tax on income may be a drawback. However, in practice, when you’re day trading, it’s often a sensible decision to share a trading gain with the ATO than to keep that loss to yourself.
Meeting The ‘Trading’ Classification
Being classed as a ‘trader’ by the ATO means you are conducting ‘business-like activities’. Fortunately, day trading tax laws have been given clarity with extensive case law in recent years. It is now clear what the ATO consider when deciding whether you are ‘trading as a business’. They look for evidence of the following:
- Motivation – Whether you’re trading with the aim of turning a profit.
- Behaviour – What is the repetition, volume, and frequency of your trading activity? Is it similar to that of other ‘ordinary’ day traders? The more frequently you trade the more likely you will tick this box.
- Organisation – Do you keep a close record of accounts, trades, and licenses? Do you have a registered business name and Australian business number? Records from your broker can be helpful material to support your claim.
- Skill – Although your trading may involve a computer, can you also show that skill is involved? More so than if you were just gambling on the markets, for example.
- Capital – How much capital are you investing in your day trading activity? Do you set a specific amount aside? The more you trade the greater the chances you meet the ‘trading’ qualification. Having said that, this is not the most important factor.
Advantages Of Being A Trader
If you do fall into this category, your day trader tax rate comes with notable benefits, some of which have been alluded to above. The most important are as follows:
- You can offset any trading losses occurred during the tax year against any other assessable income.
Any costs you incurred during the tax year are an allowable deduction for the current year.
- Both of these stipulations allow you to minimise your tax liability, affording you maximum capital to continue day trading.
The only downside is that you cannot utilise the 50% capital gains discount on shares held for in excess of twelve months. However, if you only day trade you won’t hold assets for this long anyway.
Let’s compare your potential tax liability as an investor vs a trader. Firstly, let’s say two individuals both earn $50,000 each year from their day job. Both individuals also dabble in the stock markets. At the end of the year, they each have $5,000 in losses, including costs, such as broker fees.
The share ‘trader’ could deduct that $5,000 loss immediately. However, the ‘investor’ has to carry the loss forward to use against capital gains in future years. Therefore, he has a significantly higher taxable income for the current year.
Different Instruments, Different Taxes?
A lot of traders worry that rules differ between instruments. Fortunately, the ATO is more concerned with how you’re trading than with what. CFDs, stocks, forex, and futures trading tax in Australia all falls under the same guidelines, for the most part.
However, there remains one relatively new asset where the tax laws remain grey.
As bitcoin soars in price in late 2017, the question of cryptocurrency trading tax implications in Australia is increasingly being asked.
They are not considered under the same definition as foreign currency. Instead, they are treated as a digital commodity. The ramifications of this mean you are acquiring an asset, not a currency.
The ATO recognises that you acquire one bitcoin, for $15,000, for example. However, from a taxes perspective, you do not have any income to report yet because you’ve simply swapped Australian dollars for bitcoin.
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So, for tax purposes, how does the ATO consider the trading of one cryptocurrency for another? It’s like swapping aluminium for a gold bar. You have disposed of the original asset (aluminium) and you have acquired a new one (gold).
So, let’s say you bought litecoins with your bitcoin. With your one bitcoin, you could purchase fifty-two litecoins. The price of one bitcoin is currently around $22,000. The ATO would recognise you disposed of your single bitcoin for $22,000 worth of litecoin. They would also recognise that fifty-two litecoins cost $22,000. You need to keep a record of these transactions.
Now the tax office wants to know whether you made a profit or loss. To do that you find the final total of the following calculation:
Sales proceeds – acquisition cost – other associated costs
An example of other associated costs is interest if you had to borrow capital to fund your purchase.
The single bitcoin was valued around $22,000 when you traded it for Litecoins. This would be your sale proceeds.
When you originally bought the bitcoin it was worth just $15,000. So, your profit is $22,000 – $15,000, giving you a profit of $7,000.
If you’re an active day trader you will then be taxed as per normal day trading activity. So, it is 100% assessable. The profit can be offset against other tax deductions. Alternatively, if you made a loss, you could claim it as a tax deduction.
Final Word On Instruments
On the whole, you’ll be met with the same forex and CFD trading tax implications in Australia as you would if you were share trading. The ATO is mainly concerned with your profits, losses, and expenses. The vehicle you used to generate your income is secondary. Unfortunately, that means there is no tax-free forex trading in Australia, nor in any other asset.
If you still have an asset specific question, you can seek clarification from the ATO, or from a tax professional.
Day trading Tax Preparation
Over just one year you may make thousands of different trades. Unfortunately, the ATO may demand evidence of a large number of those. To avoid a painstaking process at the end of the tax year, there a couple of straightforward tips you can follow.
1. Keep A Record
Regardless of whether you prepare your tax return yourself, or have an agent do it, you must keep a detailed record. In case of future audits, it’s worth keeping these records for at least five years. You should keep details of the following:
- Purchase & sale date
- Entry & exit points
You will find that many brokers keep records and will hand them over if requested. Although, they are not legally obliged to do anything on your behalf in regard to taxes. The information they hand over will be at their discretion.
The ATO also help facilitate ‘asset registers’. The benefit of this is it allows you to throw away records you otherwise may want to hold on to. They provide a secure way to store all your trading information. Head to the ATO website for guidance on how to set one up.
2. Day Trading Tax Software
Day trading and taxes once caused nothing but headaches. Today, however, technology has arrived to lend a hand. You can get your hands on sophisticated tax software that will make keeping records a walk in the park. Some software can be linked directly to your brokerage.
The software will then do all of the heavy lifting. So, when it comes to filing your returns at the end of the year, you have all the information you need, neatly organised and to hand.
Take Away Points
It’s worth bearing in mind that failure to meet your tax obligations, be it through late payments or non-payments, can result in serious financial penalties, and even prison. So, if you want to join the hall of fame with Australian trading legends like Richard ‘Dick’ Fish, you’ll ensure you pay all the trading taxes you owe.
It’s important to note the ATO assess day traders on a case-by-case basis. Whilst this page is not attempting to give tax advice, it does hope to provide clarity as to what your obligations may be and how they are determined. If you have any queries, be it tax write-offs or anything else, you can either contact the ATO, or you can seek professional tax advice.