Trading Taxes in Australia
Trading taxes in Australia are administered by the Australian Tax Office (ATO). Whilst there are some complications with trading tax liability, case law has helped to clarify various determining factors.
In this article, trading tax classifications will be broken down, taxes on profits and losses will be covered, as will instrument specific stipulations. We also explain the tax benefits that can be utilized by day traders Australia, as well as how to go about tax preparation.
- The Australian Tax Office (ATO) is responsible for determining whether an individual falls under the ‘investor’ or ‘trader’ tax bracket.
- Investors could be eligible for a 50% capital gains discount, whilst day traders can offset any trading losses against other income.
- Most tradeable instruments fall under the same tax guidelines, except for cryptocurrencies which are regarded as an asset rather than a currency.
- Preparation is key for ensuring a smooth process at the end of the tax year. This should include solid record keeping and utilizing tax reporting software.
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What Is Your Legal Tax Responsibility?
Trading tax laws are complex. An individual’s tax liability will depend on how much they generate and lose throughout the tax year. Other factors will also impact on a trader’s obligations, including what is being traded and which bracket their trading activity falls under.
Even those who are exempt from taxes or within their tax-free allowance could still face up to a 45% tax rate.
It is important to understand and correctly identify what your tax responsibilities are if you are a day trader. Late payments, short payments, and wrong payments could all result in hefty fines or even jail time depending on how much is owed.
Trader vs Investor
Taxes on day trading income will vary depending on whether an individual’s activity is classed as ‘trading’ or ‘investing’.
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 likely 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.
Day traders who hold an asset only for a limited time 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 are day trading, it is 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 case law in recent years. It is now clearer what the ATO consider when deciding whether you are ‘trading as a business’. They look for evidence of the following:
- Motivation – Whether you are trading with the aim of turning a profit.
- Behavior – 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.
- Organization – 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 potential benefits:
- 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 help you to minimize your tax liability, affording you maximum capital to continue day trading.
The downside is that you cannot utilize the 50% capital gains discount on shares held for more than 12 months. However, if you only day trade you will not hold assets for this long anyway.
As an example of tax liability for an investor vs a trader, 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?
However, there remains one relatively new asset where the tax laws remain grey:
As Bitcoin prices have soared in recent years, 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 recognizes that you acquire one Bitcoin, for $15,000, for example. However, from a tax perspective, there is no income to report yet because Australian dollars have simply been swapped for Bitcoin.
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The ATO consider the trading of one cryptocurrency for another is like swapping aluminum for a gold bar. You have disposed of the original asset (aluminum) and you have acquired a new one (gold).
For example, let’s say you bought Litecoin 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 recognize you disposed of your single Bitcoin for $22,000 worth of Litecoin. They would also recognize that fifty-two Litecoins cost $22,000. You need to keep a record of these transactions.
The tax office will want 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 are 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
Overall, forex and CFD trading tax implications in Australia are essentially the same as share trading. The ATO is mainly concerned with profits, losses, and expenses. The vehicle used to generate income is secondary.
Unfortunately, that means there is no tax-free forex trading in Australia, nor in any other asset.
If you have an asset specific question, you can seek clarification from the ATO, or from a tax professional.
Day Trading Tax Preparation
If you make a large number of trades within one year, the ATO may demand evidence of many of those. To avoid a painstaking process at the end of the tax year, there are a couple of straightforward tips you can follow.
1. Keep A Record
It is important to keep detailed trading activity records for at least five years in case of future audits. You should keep details of the following:
- Purchase & sale date
- Entry & exit points
Many brokers keep records and will hand them over if requested, although they are not legally obliged to. The information they hand over will be at their discretion.
The ATO also helps 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
Utilizing sophisticated tax software will ensure that keeping records is seamless and accurate. Some software can be linked directly to your brokerage and will do all the administration and organization of records on your behalf.
eToro, for example has an integrated tax reporting solution that makes this process easier.
Take Away Points
Understanding how tax brackets are determined with regards to day trading can be overwhelming. It is important to note, though, that the ATO assesses day traders on a case-by-case basis and there is plenty of supporting guidance and rules for traders on the ATO website.
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, contact the ATO or seek professional tax advice.
The writing and editorial team at DayTrading.com use credible sources to support their work. These include government agencies, white papers, research institutes, and engagement with industry professionals. Content is written free from bias and is fact-checked where appropriate. Learn more about why you can trust DayTrading.com