What makes a Trader v Investor

When completing the online income tax return, one of the questions asked by IRD is:

(Has the entity) "repurchased, redeemed or cancelled shares"

I assume that the IRD is trying to see if there is some sort of pattern of selling and buying? – hence trading.

I didn’t tick the box because I haven’t repurchased, redeemed or cancelled shares this financial year.
That might not always be the case in the future though.

I consider myself an investor and not a trader.

I’ve always been of the understanding that if I buy shares to ‘derive assessable income’ any subsequent capital gain is tax free. But there obviously has to be some sort of threshold and/or cross over point, as perceived by the IRD, whereby an investor becomes a trader and therefore their capital gains are taxed.

Does anyone have any experience with IRD as to what IRD consider to be a pattern of trading?
Is there some sort of magic figure IRD use when a person buys and sells the same stock in a financial year?
Is it prudent to keep a record of why buying/selling decisions are made? (and would it make any real difference when debating the point with IRD?)

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Originally Posted by dubya

When completing the online income tax return, one of the questions asked by IRD is:

(Has the entity) "repurchased, redeemed or cancelled shares"

I assume that the IRD is trying to see if there is some sort of pattern of selling and buying? – hence trading.

I didn’t tick the box because I haven’t repurchased, redeemed or cancelled shares this financial year.
That might not always be the case in the future though.

I consider myself an investor and not a trader.

I’ve always been of the understanding that if I buy shares to ‘derive assessable income’ any subsequent capital gain is tax free. But there obviously has to be some sort of threshold and/or cross over point, as perceived by the IRD, whereby an investor becomes a trader and therefore their capital gains are taxed.

Does anyone have any experience with IRD as to what IRD consider to be a pattern of trading?
Is there some sort of magic figure IRD use when a person buys and sells the same stock in a financial year?
Is it prudent to keep a record of why buying/selling decisions are made? (and would it make any real difference when debating the point with IRD?)

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You should keep records. I have records of every trade done since starting 22 years ago.

It is such a gray area. There must be 1000s of investors who sold shares when covid started, then bought some back near the bottom. They were not really trading, just using common sense and trying to avoid potential disaster.

would be pretty harsh for the IRD to come down on the covid sellers/ rebuyers, unless of course they are normally buying in and out of the same stock

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Originally Posted by dubya

When completing the online income tax return, one of the questions asked by IRD is:

(Has the entity) "repurchased, redeemed or cancelled shares"

I assume that the IRD is trying to see if there is some sort of pattern of selling and buying? – hence trading.

I didn’t tick the box because I haven’t repurchased, redeemed or cancelled shares this financial year.
That might not always be the case in the future though.

I consider myself an investor and not a trader.

I’ve always been of the understanding that if I buy shares to ‘derive assessable income’ any subsequent capital gain is tax free. But there obviously has to be some sort of threshold and/or cross over point, as perceived by the IRD, whereby an investor becomes a trader and therefore their capital gains are taxed.

Does anyone have any experience with IRD as to what IRD consider to be a pattern of trading?
Is there some sort of magic figure IRD use when a person buys and sells the same stock in a financial year?
Is it prudent to keep a record of why buying/selling decisions are made? (and would it make any real difference when debating the point with IRD?)

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Isn't that question related to the entity that you are filling in the tax return for? Ie if you are doing a tax return for a company, lets call it Dubya Ltd, then the IRD are wanting to know if Dubya LTD has repurchased, redeemed or cancelled shares. I don't think it has anything to do with share trading per-se. But I could be wrong. From memory this question gets asked on one of my entities that I complete IRD returns for but that entity does not even own a share in anything.

(Has the entity) "repurchased, redeemed or cancelled shares" - I think this might be applicable to shares in your own company rather than shares you've bought or sold?

Stuff IRD..go n tell them how we felt during feb, March and April 2020.

They won't even care that your balls were sweating....night n day...

I can even smell it till now...yum....lol

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Originally Posted by blackcap

Isn't that question related to the entity that you are filling in the tax return for? Ie if you are doing a tax return for a company, lets call it Dubya Ltd, then the IRD are wanting to know if Dubya LTD has repurchased, redeemed or cancelled shares. I don't think it has anything to do with share trading per-se. But I could be wrong. From memory this question gets asked on one of my entities that I complete IRD returns for but that entity does not even own a share in anything.

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Originally Posted by DNM

(Has the entity) "repurchased, redeemed or cancelled shares" - I think this might be applicable to shares in your own company rather than shares you've bought or sold?

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Yes you're both quite right. Thanks. I had a bit of a brain fade I think. I saw the word 'shares' and automatically went to listed shares.....then started to think about trading.......then started to think about losing 33% of capital gains. :scared::scared::scared:

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Originally Posted by King1212

Stuff IRD..go n tell them how we felt during feb, March and April 2020.

They won't even care that your balls were sweating....night n day...

I can even smell it till now...yum....lol

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Yes I felt pretty sick at the time too but OCA @ .44 & .56, GNE @ 2.01, and ARG @ .95 makes the sick feeling I had then, more of a happy fading memory now lol :):)

Investor:
Someone who buy and holds for a long time collects the dividends and makes himself rich.

Trader:
Someone who buys and sells shares every five minutes on whim and makes his broker rich.

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Originally Posted by Snow Leopard

Investor:
Someone who buy and holds for a long time collects the dividends and makes himself rich.

Trader:
Someone who buys and sells shares every five minutes on whim and makes his broker rich.

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think you mean "Day Trader" .... I've been trading shares for 15yrs ...yes I don't hold for dividends but capital gain .. some shares are held for years some for weeks
I like the ability to write off costs against my tax or some years collect tax losses = tax credit .. Trader = freedom IMHO

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Originally Posted by JBmurc

think you mean "Day Trader" .... I've been trading shares for 15yrs ...yes I don't hold for dividends but capital gain .. some shares are held for years some for weeks
I like the ability to write off costs against my tax or some years collect tax losses = tax credit .. Trader = freedom IMHO

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An investor can also write off costs against their other income (dividend). No difference as to the tax treatment there. But as an investor I do not pay tax when I do sell my shares at a profit. Rather be an investor than a trader.

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Originally Posted by blackcap

An investor can also write off costs against their other income (dividend). No difference as to the tax treatment there. But as an investor I do not pay tax when I do sell my shares at a profit. Rather be an investor than a trader.

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Yes I understand an investor cannot trade more than a several times per year aka you can't sell and buy back into the same company in within short period of time ...
I was an investor back pre 2005 made some great returns off just several trades but was pushing it and wanted more freedom as so many times I was limited not wanting to be classed as a trader..

Glad to have formed a company and now can trade as much or little as I want ...of course one wouldn't become a trader if they had a small amount of funds and time invested weekly... accountant costs etc ... I have also used the same company to purchase property or small business operations etc

And as my focus is on risker end of the market I like the protection ability to claim capital losses against future profits ...

Yes I knew you could claim cost on taxable incomes like Dividends...but really how much tax saving do you see here ?? whats you costs being an investor ? you only trade less than few times a year

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Originally Posted by JBmurc

Yes I understand an investor cannot trade more than a several times per year aka you can't sell and buy back into the same company in within short period of time ...
I was an investor back pre 2005 made some great returns off just several trades but was pushing it and wanted more freedom as so many times I was limited not wanting to be classed as a trader..

Glad to have formed a company and now can trade as much or little as I want ...of course one wouldn't become a trader if they had a small amount of funds and time invested weekly... accountant costs etc ... I have also used the same company to purchase property or small business operations etc

And as my focus is on risker end of the market I like the protection ability to claim capital losses against future profits ...

Yes I knew you could claim cost on taxable incomes like Dividends...but really how much tax saving do you see here ?? whats you costs being an investor ? you only trade less than few times a year

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Ahha, I get you. We were probably at cross purposes. The thing I like about being an investor is that you never get taxed on any gains you make realisable or other. As a trader you do get to claim the losses but must pay tax on the gains. Long term you would expect to make gains so there is a tax loss.
It all boils down to intent. You can probably trade 50 times a year if the intent is to build an income producing stream from your portfolio and if the intent is not to trade the stocks. Sometimes I do take some profits off the table and re-invest elsewhere with good rationale. If a stock goes up a lot (say like ATM) then it becomes too weighty in the portfolio and its called rebalancing. If it falls in price again it becomes underweight and I might buy a few back.
But its not out and out trading. I have control of another entity that does that purely as its operations and yes I do pay tax on gains there.

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Originally Posted by blackcap

Ahha, I get you. We were probably at cross purposes. The thing I like about being an investor is that you never get taxed on any gains you make realisable or other. As a trader you do get to claim the losses but must pay tax on the gains. Long term you would expect to make gains so there is a tax loss.
It all boils down to intent. You can probably trade 50 times a year if the intent is to build an income producing stream from your portfolio and if the intent is not to trade the stocks. Sometimes I do take some profits off the table and re-invest elsewhere with good rationale. If a stock goes up a lot (say like ATM) then it becomes too weighty in the portfolio and its called rebalancing. If it falls in price again it becomes underweight and I might buy a few back.
But its not out and out trading. I have control of another entity that does that purely as its operations and yes I do pay tax on gains there.

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Yes is a real grey area my accountant deemed my investing back early 2000's as getting close to trading with around 7-9 trades pa .. I guess like you say its what kind of trading you are doing .. if you are only Buying up investments and selling down a few spread over the year then no stress

I had no real focus on dividends taxable incomes etc and ASX mainly..at the time I did also have a Trading company I was using to spec build in Qutown with ...in the end I just wanted freedom and not an audit and the stress I might be liable on tax avoidance ... so closed down the Property only Trading company and created a new one with focus on the trading equities+ other trading opts

Investors can sleep at night because their mantra is "Its not timing the market, its time in the market". Traders can't sleep at night.

U tell me in the next couple months...whether u can sleep or not. When the market is in the bear....even market darling ATM will down ....

No stocks that safe. USA debts is increasing to $55 T.....

So..it is just a ticking bomb

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Originally Posted by King1212

U tell me in the next couple months...whether u can sleep or not. When the market is in the bear....even market darling ATM will down ....

No stocks that safe. USA debts is increasing to $55 T.....

So..it is just a ticking bomb

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Oh no more things to worry about. Do I sell now or do I hold a bit longer. Hahaha

Actually sleep better when the market is going down, can't sell. But when the market is going up, what to do?.

you be both a trader and investor. Run multiple entities and portfolios and as stocks mature in value you can move then into the trading porfolio and move trading stocks into trusts before they mature else you will pay tax on them as you do an off market transfers.

Once a trader, all trades are caught. Even if under another entity. Just like property development. No doubt many investors are really traders, just waiting to be caught out by IRD. My brother was an investor, until he lost a car on Wynyard, at which time he wanted to be a trader. I am happy to pay tax on profits, and claiming losses eases the burden. I was a Chartered Accountant for 35 years and never did I have any investors caught out as traders. So go for your life, whichever suits you most. But in your tax return where you have to declare non taxed gains, if these amounts are large and consistent, I would be careful.

If you enter every trade with an underlying assumption that there could be an eventual dividend gain sometime in the future, and each of your exits was due to a change in that hypothesis how can IRD classify you as a trader? Doesn't make any sense

Except if the IRD makes the assessment that you are a trader based on their criteria, YOU HAVE TO PROVE THEM WRONG.
Ahhh what do I know, I am now retired, haha.

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Originally Posted by Cadalac123

If you enter every trade with an underlying assumption that there could be an eventual dividend gain sometime in the future, and each of your exits was due to a change in that hypothesis how can IRD classify you as a trader? Doesn't make any sense

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You think thats bad few years ago the IRD brought in Tax on Gold and Silver Bullion ... myself and mate purchase a few bars esp. my mate with 60,000oz of silver as a long term 10yr min hold plan ..but years later we are told now if you sell for more than you paid you will have to pay TAX ??

But we don't have Cap gains tax in NZ ?? we are not trading the metal .. how can one be taxed on it ? and if so if we sell for less than paid will the Govt give us tax credits ???

If we went and purchase ETPMAG which is a Silver Bullion ETF we wouldn't get taxed ... so does that mean if we exchanged are silver bullion for certificates (Paper silver then thats no longer bullion ??)

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Originally Posted by bottomfeeder

Except if the IRD makes the assessment that you are a trader based on their criteria, YOU HAVE TO PROVE THEM WRONG.
Ahhh what do I know, I am now retired, haha.

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Yes thats what got me to become a tax paying trader .. accountant stating I'm in a grey area with share investment/trading I might just have to prove to the IRD I'm not in time...

"But in your tax return where you have to declare non taxed gains, if these amounts are large and consistent, I would be careful."

all our limited companies that trade pay tax and our software transactions solution provide a much higher level of journal data source auditing than the simple traditional file systems used by most accountants. I should know as i know the authors of those systems going right back to solution 6.

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Originally Posted by bottomfeeder

......... But in your tax return where you have to declare non taxed gains, if these amounts are large and consistent, I would be careful.

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have done my own return for many years but never seen this section to declare untaxed gains?

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Originally Posted by Mr Slothbear

have done my own return for many years but never seen this section to declare untaxed gains?

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Only if youre filing an IR10 attachment. ie summary of financial statements.

woops wrong thread.

IRD use the word 'intent' which is a lovely grey definition. What was your intention at the time of purchase? Make a note at the time, as that is what they will ask you to start with. They also look at the number of trades and the number is again in the grey area but around 5 or more per annum. That is 10 transactions counting the buys and sells.
It is best to separate the investing and trading, as one wouldn't want a genuine long term investment that produces a decent capital gain to be captured as a trade and therefore subject to tax. Also remember, once a trader, always a trader in the eyes of IRD. I keep trades and investments separate by trading through a company, and the company pays tax on any net profits - ie brokerage and other costs such as accountants fees are claimable. Then I pay myself a tax paid dividend every now and again and get a refund on the difference between my personal tax rate and the company tax rate.

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

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Originally Posted by Mr Slothbear

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

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On face value I'd say yes, that would be a trade and liable for capital gains tax.

The underlying tax principle is 'intent'. If you intend to buy, and sell, for a capital gain, that is a taxable trade.

If you intend to buy, and not sell, that is a non-taxable investment, except on dividends.

For the later though, if at some time in the future you sell because of some circumstance, for example you are concerned about the company and wish to shift your investment elsewhere, that is a grey area, but unlikely to be interpreted as the former intent, to buy and sell purely for a capital gain.

I suggest keeping a trading diary "I bought this share on this day for X$ with the intent to hold it forever". Then if circumstances change in the future, make another diary note "circumstances changed and I sold for this reason and intend to reinvest it elsewhere".

If you genuinely have the intent to take up the rights, solely to sell them for an arbitrage capital gain, then I would say that is certainly a taxable trade.

The thing is though, whether you'd ever come up on the IRD's radar.

Seems to be plenty of people who obviously trade and don't care much about taxable capital gains, and get away with it. But IRD has a long memory and has the most powerful investigative powers in government, so if for some reason they do decide to have a look in to ones financial affairs in the future, for whatever reason, history can can catch up with them.

Best just to be honest imo, buy the rights, sell them at a profit and voluntarily pay the appropriate capital gains tax at your going rate, and be done with it. So your 10% turns into 6.6% gain, after tax, for example.

Baa_Baa you are suggesting then that you can pick and choose what you call a taxable trade and a non taxable trade at your will. My understanding is that you are either a trader or not.

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Originally Posted by Mr Slothbear

Wondering if someone can help with a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

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I would say it depends on when you bought the head shares.

Scenario A: If you bought the shares:

a/ after the non-renouncable rights offer was made BUT
b/ cum the non-renouncable rights offer closing date AND
c/ decided to sell the same number of head shares you would acquire via the non-renouncable offer, effectively arbitraging a higher 'market price' of the shares against the lower acquisition price of shares that you would obtain via the non-renouncable offer. THEN
d/ the IRD could argue that you must have bought the head shares with the intention of selling a portion of them. IOW the difference between the price you paid for the shares 'off market' and the price you sold those same number of shares 'on market' is a taxable profit.

However,

Scenario B: If you have held your head shares in an investment portfolio before the non-renouncable offer was notified to the stock exchange:

a/ You would not have known that such an offer was coming on the table. AND
b/ The offer means that your formerly 'balanced' share portfolio would become unbalanced, after you have taken up your shares in the non-renouncable offer.

In this instance it is perfectly legitimate to reduce your expected balance of shares as well as taking up the non-renouncable offer by selling a few shares you already own today in advance of that offer closing (if you wish). The IRD cannot argue that you are 'arbitrage trading', because there is no way you could have known about such an arbitrage opportunity in advance. It is perfectly accepted 'investor behaviour' to adjust the market position of your portfolio periodically to take account of relative market price level changes. Such adjustments if made annually, or in accordance with an unexpected market event (of which a cash issue is one kind) is legitimate investor behaviour that is not generally taxable from a capital perspective.

SNOOPY

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Originally Posted by Mr Slothbear

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

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The answer is YES. Plain & simple.

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Originally Posted by Snow Leopard

The answer is YES. Plain & simple.

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But what if the existing shares that are held as a long term investment were sold before the rights to the new shares were taken up (I.e. sell to buy back at a cheaper price)?

Often share prices fall while a capital raise is underway, which often limits the arbitrage.

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Originally Posted by Mr Slothbear

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

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I see you have a big position in SFR.
Just wondering why you feel so confident about this share.Is it the industry, management or risk return calculation?

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Originally Posted by Mr Slothbear

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

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Originally Posted by Snow Leopard

The answer is YES. Plain & simple.

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The Snow cat has answered a shortened version of your question Mr Slothbear that he has 'cut down' in bold. That shortened version of your question directly links a buy and a sell act in a way that sounds like your 'diary entry aim' is to make a profit on those two transactions. If that is true, then his answer 'yes such a profit is taxable' is correct. However, because the distinction between 'trader' and 'investor' is a matter of intent, and intent puts your transaction in a wider context, then attempting to answer your question while removing that wider context is liable to give you the wrong answer.

We can only go from the information you have supplied us Mr Slothbear. The context of your question was that you considered your existing shareholding on the high side in your overall portfolio composition, before the non-renouncable share issue was announced. Now what would have happened if you had sold down your shareholding the day before the non-renouncable share issue was announced? Would you have even put your question to the forum? I suspect not. As an investor you are allowed to rebalance your capital to avoid your portfolio being overtly concentrated in one particular investment. There is no automatic tax liability incurred in doing this.

The way I read your question, it sounds like the non-renouncable share offer was a 'wake up call'. It highlighted that should you take up your non-renouncable rights, then your portfolio composition would become even more unbalanced. Thus the 'share offer' was 'a call to action' to make sure your portfolio weighting in this particular share didn't go even higher. It comes down to:

1/ If your intent in selling the head shares is to downsize that part of your portfolio, then any profit you make from this one transaction is non-taxable.
2/ Likewise any profit (unrealised in this instance) that you make by assisting with a capital raising and then finding that your newly subscribed for shares are trading at a price higher than what you subscribed to them for is non-taxable.

But there is no reason to link these two transactions. One is not the mirror image of the other! In the first transaction the company neither pays out nor receives any money. In the second transaction, the company receives new capital to help recapitalise their business.

The fact that you, Mr Slothbear, have chosen to link the two transactions because the 'number of shares match' is a mind trick you have played on yourself. Who decided the number of shares you propose to sell on the market, exactly matched the number of rights you were allowed to take up? It would have been you would it not? What would have happened if you had made a different decision: To wait until you received your non-renouncable rights, and then sell all of your existing shares on market (while still taking up the rights). Would you then advocate paying tax on profits from the shares you sold that matched the rights you are about to take up, but not pay any tax on profits made on the balance of the shares sold because they did not have a matched pair transaction in the rights offer?

Of course there is nothing to stop you 'changing your intent', and reformulating these two quite separate transactions -it must be said- as a 'trade' and paying tax on it if you so wish. But if you are not a trader, why would you do such a thing?

SNOOPY