Trading Taxes in Australia
Trading taxes in Australia are administered by the Australian Taxation 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, and instrument-specific stipulations will be discussed. We also explain the tax benefits that can be utilized by day traders in Australia, as well as how to go about tax preparation.
If you have any queries, be it tax write-offs or anything else, contact the ATO or seek professional tax advice.
Key Takeaways
- The Australian Taxation Office (ATO) distinguishes between investors (typically taxed under capital gains tax rules) and people carrying on a business of trading (profits treated as ordinary income).
- Australian resident individuals who hold a CGT asset for at least 12 months may be eligible for a 50% capital gains tax discount.
- For many retail traders, shares, CFDs, forex and futures are taxed under similar principles (capital vs revenue account).
- 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 whether their activities are treated as investing or as carrying on a business of trading for tax purposes.
For Australian residents, marginal income tax rates currently range from 0% on income within the tax-free threshold up to 45% on income above $190,000, and your net trading profits or net capital gains are included in your assessable income, so your overall tax is worked out using your marginal 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’.
‘Investor’
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 are an Australian resident individual and 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.
‘Trader’
Some very active traders who hold assets only for a limited time may be treated as carrying on a business of trading, but the ATO looks at a range of factors, not just how long you hold each position.
If you are genuinely carrying on a business of trading, your net trading profit (after allowable expenses) is included in your assessable income and taxed at your marginal rate. Trading losses and related expenses are generally deductible, but if you are an individual, you may need to satisfy the non-commercial loss rules before you can offset those losses against your other income.
Some believe this focus on paying tax on income may be a drawback. However, in practice, when you are day trading, it is 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:
- If your trading qualifies as a business, you may be able to offset trading losses against other assessable income (such as salary or other investment income), subject to ATO rules on business losses and non-commercial losses.
- 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.
Example
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, and each has $5,000 in share-related losses, including broker fees.
If one is genuinely carrying on a share-trading business and satisfies the non-commercial loss rules, they can generally deduct the $5,000 loss against their other income in that year. The investor’s $5,000 is a capital loss, which can only be used to offset capital gains now or in future years, so if they have no capital gains, their taxable income for the current year remains higher.
Different Instruments, Different Taxes?
Fortunately, the ATO is more concerned with how you are trading than with what. CFDs, stocks, forex, and futures trading tax in Australia all generally fall under the same guidelines.
However, there remains one relatively new asset class where the rules are more complex and still evolving – cryptocurrencies:
Cryptocurrency Taxes
As Bitcoin prices have soared in recent years, the question of cryptocurrency trading tax implications in Australia is increasingly being asked.
For tax purposes, most crypto assets are not treated as foreign currency. The ATO generally treats them as property (CGT assets), so when you acquire crypto, you are acquiring an asset rather than 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.
Day Trading Tax Calculator
The ATO consider the trading of one cryptocurrency for another to be 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 that 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 at 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 carrying on a business of trading crypto assets, your profits are generally treated as ordinary income (fully assessable) rather than capital gains, and your losses and related costs are deductible, subject to the non-commercial loss rules that apply to individuals. If you are not in business, gains and losses on crypto are usually treated under the capital gains tax rules.
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.
This means there is no general tax-free status for forex or other trading profits; however, some assets, such as a main residence or certain personal-use assets (including some crypto used purely for personal purchases), can be exempt from capital gains tax in specific circumstances.
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 after you lodge them, in case of future audits. For CGT assets, you usually must keep records for as long as you own the asset and then for five years after you dispose of it or use a related capital loss. You should keep details of the following:
- Instrument
- Purchase & sale date
- Price
- Size
- Entry & exit points
Regulated trading brokers are required to keep certain records and provide clients with confirmations and statements, but you shouldn’t rely on your broker as your only record-keeping system.
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 regard 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.
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