Trading Shares? Are You an Investor or a Trader?

More people took up share trading during the pandemic years, and many still aren’t clear on the difference between being a share investor and being a share trader for tax purposes, even though it changes how your profits and losses are taxed. Here’s the distinction.

1. Share investor vs share trader

Share investor:

  • Profit on selling shares is taxed as a capital gain in the year of sale, but if you’ve held the shares for more than 12 months, you get a 50% CGT discount.
  • A loss can only offset gains from other shares or investment property sales. Any unused loss carries forward to future years, to offset future capital gains. It can’t be used against salary, interest, or dividend income.

Share trader:

  • Profit is taxed as ordinary business income in the year it’s made, with no CGT discount.
  • A loss can only offset other business income, not personal income like salary. Unused losses carry forward to offset future business income.

2. Can a trader’s loss offset personal income?

Clients often ask whether a share trader’s business loss can ever be used against personal income. Under the ATO’s rules for offsetting current-year business losses, it can, if you meet any one of these three conditions:

  1. Your business is primary production or professional arts, and your other income (excluding net capital gains) for the year is under $40,000.
  2. Your individual income for the year is under $250,000, and at least one of the following also applies: your assessable business income for the year is at least $20,000; your business has been profitable in three of the past five years (including this one); your business uses or holds at least $500,000 of real property continuously in its activities (excluding your home and adjacent land); or your business continuously uses at least $100,000 of other assets (excluding motor vehicles).
  3. The Commissioner has exercised discretion to allow you to claim the loss.

3. How does the ATO decide which one you are?

There’s no single bright-line test. The ATO looks at the whole picture, weighing factors including:

  • How frequently and repetitively you trade
  • The average length of time you hold each parcel of shares
  • Whether you operate with a defined trading system and business plan
  • Whether you’re registered for an ABN
  • Whether you buy trading-related books or subscribe to trading publications
  • Whether you regularly attend trading-related training
  • Whether you keep records the way a business would

Notably, the size of your capital or whether you’re actually profitable isn’t on its own decisive.

Two examples

Example 1, trader. Mia is an electrical engineer who started trading after watching a TV segment on it. She set up a home office with a computer and internet access, using $100,000 of her own money plus a $50,000 bank loan.

She analyses the market daily using financial papers, investment magazines, stock reports, charts and trend lines, aiming to identify shares likely to rise in the short term so she can profit from a brief holding period. In the past income year she made 60 trades: 35 buys and 25 sells, averaging 500 shares at around $1,000 per buy, and 750 shares at around $1,800 per sell, all executed online. Her average holding period was twelve weeks. Her sole trader activity made a $5,000 loss for the year.

Even without a profit, Mia’s activity displays the hallmarks of a business carried on with the intention of profit: it’s regular, repetitive, organised in a business-like way, and involves a meaningful amount of capital deployed through a large volume of trades. She’s a trader.

Example 2, investor. George is an accountant who, over several years, bought 200,000 shares across 20 blue-chip companies, a total investment of $1.5 million. He bought for the dividend income and would only consider selling if the share price rose significantly. In the past income year he sold 20,000 shares for a $50,000 gain.

Despite the sizeable gain, George isn’t a trader. He bought to earn dividend income, not to profit from buying and selling shares.

If you’re unsure which category applies to you, or want help getting your share trading set up correctly from a tax perspective, contact us.