Tax on Capital Gains: Trading vs Buy-and-hold

Hi There,

Vince has kindly opened up this new area for newbie intro's and questions.

I'm Stuart from Auckland. I have considered property investment for the last couple of years, but the figures never added up, so I found my way here. ;)

My question tonight is about tax on capital gains.

In property, some people use trust structures to separate their property trading activities from their buy-and-hold activities, with the goal of minimising their tax on capital gains.

Is share trading similar?

Can a share trader also have a buy-and-hold portfolio which is not subject to tax on capital gains? If so, what structures do you recommend to separate trading activities from buy and hold activities?

Regards
Stuart

Hi Stuart,

Your accountant will be able to shed more light on this for you but the way it was explaned to me was similar to property.

Buy and Hold. Similar to property, if you brought with the INTENTION of holding long term to receive dividends then the capital gains will not be taxable.

Trading. Also similar to property, if you brought with the INTENTION of selling for a profit in a short space of time then the capital gains will be taxable.

It is your intention when you purchase that is tricky bit. Just remember with the IRD you are basically guilty and have to prove your innocence to them.

The way I do things which the accountant seems happy with is a buy and hold portfolio that I receive dividends from, I keep these shares under my own name.

For my trading I use a limited liability company (which can also be owned by your trust if you like), the gains on this are taxable, however you are also able to write of your expenses (computer, internet connection, home office expenses etc etc)

This method keeps everything separated and easy but i'm sure there are other ways as well.

Happy trading

Capybara

Thanks for your post. I have a limited liability company, so it makes good sense to use that for future trading activities - I will discuss it with my accountant of course, but your comments have been valuable!

funguspudding

Thanks to you also. Nothing wrong with being pedantic as far as I am concerned. It actually helps clarify the situation.

Regards
Stuart

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Originally Posted by Cadmium

Hi There,

Vince has kindly opened up this new area for newbie intro's and questions.

I'm Stuart from Auckland. I have considered property investment for the last couple of years, but the figures never added up, so I found my way here. ;)

My question tonight is about tax on capital gains.

In property, some people use trust structures to separate their property trading activities from their buy-and-hold activities, with the goal of minimising their tax on capital gains.

Is share trading similar?

Can a share trader also have a buy-and-hold portfolio which is not subject to tax on capital gains? If so, what structures do you recommend to separate trading activities from buy and hold activities?

Regards
Stuart

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Cadmium

Welcome to Sharetrader :)

A company structure is useful for trading, but not without pitfalls!

You can claim expenses against your "trading" as an individual, so make sure you fully understand a company structure BEFORE starting out.

A company does "ring fence" a maximum tax rate of 30%, but you have to get the profits out, & thats where it can get tricky...

Questions to consider:

1. Have you elected to become a "Qualifying Company"?

2. If so, have you elected to become a "Loss Attributing Qualifying Company"?

3. Do you know the difference between the two?

http://www.ird.govt.nz/resources/fil...8a03/ir435.pdf

Here's the IRD booklet to help you start.

4. Are you familiar with the "FDR" rules - Fair Dividend Regime?

http://www.kensingtonswan.com/Public...xation/PIE.pdf

5. Are you familiar with the "FIF" rules - Foreign Investment Funds?

http://www.ird.govt.nz/toii/fif/

One of the biggest differences between an individual & a company for trading, is the loss of the "cash basis method" for non individuals.

That means an individual only has to include "realized" profits & losses, ie "cash basis" when investments are sold.

A non individual (Company, Trust etc) must account for transactions on a "accrual basis" that means "unrealized gains & losses" must be included.

If you have other questions, post them here & i'll try & help you.

Or send me a private message if you don't want to post things in public.

I'm a contract financial accountant, ex PriceWaterhouseCoopers, and i'm a share trader myself ;)

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Cadmium

Welcome to Sharetrader :)

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Thanks shasta!

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1. Have you elected to become a "Qualifying Company"?

2. If so, have you elected to become a "Loss Attributing Qualifying Company"?

3. Do you know the difference between the two?

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My answers are 1. "No", 2. "No" and 3."I understand the key advantage of LAQC's but I know less about this than I should". I trade under this company as an IT consultant. I am the only shareholder and I simply draw wages from it.

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4. Are you familiar with the "FDR" rules - Fair Dividend Regime?

5. Are you familiar with the "FIF" rules - Foreign Investment Funds?

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Thanks for those links. I am not thinking beyond the NZX and ASX at this stage. From what I understand from the IRD link, it appears most ASX company income is exempt from the FIF rules (i.e. treated the same as income from NZ shares).

This has been very useful information!

Regards
Cadmium

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Originally Posted by Cadmium

...most ASX company income is exempt from the FIF rules (i.e. treated the same as income from NZ shares).

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Yep, any Aus company big enough to be paying dividends are typically exempt from FIF, but you still lose the franking (Aus tax dept steals it, in essence) and you got to pay NZ tax on the net smaller div amount after franking, so Aus co needs to be making 30% more than a NZ co.

Non-dividend Aus companies (juniors and the like), of which there are many, means gains are solely in SP appreciation. SP appreciation are capital gains (and there is no capital gains tax in NZ). And then you must pay 5% FIF tax on appreciation for that year. 5% on (effectively) entire earnings for FIF companies versus 30% on a dividend that has already been shaved by 30% Franking.

Of course FIF versus non-FIF businesses is not comparing apples with apples (more like apples with screwdrivers).

There was discussion above about pros and cons of using a company for one of these. Costs to setup & run a company, and loss of 'cash basis', is enough for me to not set up a company to make the separation.

I was thinking to simply have two share trading accounts (perhaps with two different brokers or perhaps with the same broker). One called 'Joe Bloggs', the other 'Joe Bloggs Trading'.

Here's my question.
If I set up 2nd trading account with same broker (in my case ASB Securities), should I (or can I) have only one CSN & FIN (for NZ) and one HIN (for Aus) applicable to both accounts.

This would be enough to show distinction for IRD and would be less share registry paperwork & complication. It would mean I could have an investment in a company and then buy some shares in that same company to trade, and they would all be combined in the share registry summaries. I would have to keep track of how many are applicable to the trading (which would be easy because I'd have separate portfoilio records)

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Originally Posted by Cadmium

Hi There,

Vince has kindly opened up this new area for newbie intro's and questions.

I'm Stuart from Auckland. I have considered property investment for the last couple of years, but the figures never added up, so I found my way here. ;)

My question tonight is about tax on capital gains.

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It's worth noting that there is no capital gains in NZ on anything. Certain activities however will incur income tax, assessed on the profit made on selling. If what you are doing is providing your bread and butter, or daily living, then that activity is taxable. If you make a profit on the sale of a long held asset, and don't make a habit of doing that, then it is almost certainly not going to be taxable. There are all sorts of grey areas in between mostly depending on your intention at the time of purchase.

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Originally Posted by tobo

There was discussion above about pros and cons of using a company for one of these. Costs to setup & run a company, and loss of 'cash basis', is enough for me to not set up a company to make the separation.

I was thinking to simply have two share trading accounts (perhaps with two different brokers or perhaps with the same broker). One called 'Joe Bloggs', the other 'Joe Bloggs Trading'.

Here's my question.
If I set up 2nd trading account with same broker (in my case ASB Securities), should I (or can I) have only one CSN & FIN (for NZ) and one HIN (for Aus) applicable to both accounts.

This would be enough to show distinction for IRD and would be less share registry paperwork & complication. It would mean I could have an investment in a company and then buy some shares in that same company to trade, and they would all be combined in the share registry summaries. I would have to keep track of how many are applicable to the trading (which would be easy because I'd have separate portfoilio records)

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My amterish opinion would be to operate as two entities in some form.
Trying to convince the IRD that "XYZ Ltd was my long term portfoio I sold because......"
Not going to work.
I use to operate this way until I moved my long term holdings into a trust and with a different broker.

I think most on here would agree (I hope!) :o

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Originally Posted by Jay

My amterish opinion would be to operate as two entities in some form.
Trying to convince the IRD that "XYZ Ltd was my long term portfoio I sold because......"
Not going to work.
I use to operate this way until I moved my long term holdings into a trust and with a different broker.

I think most on here would agree (I hope!) :o

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I'm not sure that I agree. The IRD take each case on merit, but overall they look for a pattern. I doubt that using a separate entity would make much difference unless the shareholding differs. I do know some who have done what you suggest and got away with any tax on long holdings, but I don't think you can guarantee it. Good luck.

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Originally Posted by tobo

Yep, any Aus company big enough to be paying dividends are typically exempt from FIF, but you still lose the franking (Aus tax dept steals it, in essence) and you got to pay NZ tax on the net smaller div amount after franking, so Aus co needs to be making 30% more than a NZ co.

Non-dividend Aus companies (juniors and the like), of which there are many, means gains are solely in SP appreciation. SP appreciation are capital gains (and there is no capital gains tax in NZ). And then you must pay 5% FIF tax on appreciation for that year. 5% on (effectively) entire earnings for FIF companies versus 30% on a dividend that has already been shaved by 30% Franking.

Of course FIF versus non-FIF businesses is not comparing apples with apples (more like apples with screwdrivers).

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I may have it wrong here but my understanding is that ASX listed company's are exempt from FIF tax regardless of whether they pay a dividend, are large or small cap etc. For other jurisdictions FIF only kicks in where initial investment exceeds $50K NZD.

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Originally Posted by tobo

Yep, any Aus company big enough to be paying dividends are typically exempt from FIF, but you still lose the franking (Aus tax dept steals it, in essence) and you got to pay NZ tax on the net smaller div amount after franking, so Aus co needs to be making 30% more than a NZ co.

Non-dividend Aus companies (juniors and the like), of which there are many, means gains are solely in SP appreciation. SP appreciation are capital gains (and there is no capital gains tax in NZ). And then you must pay 5% FIF tax on appreciation for that year. 5% on (effectively) entire earnings for FIF companies versus 30% on a dividend that has already been shaved by 30% Franking.

Of course FIF versus non-FIF businesses is not comparing apples with apples (more like apples with screwdrivers).

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I've simplified my situation (of using companies to trade/invest) & now have 2 a/c's with asb sec, one in my name & a margin lending a/c (nominee a/c).

This is more than enough distinction for IRD purposes

Have just been loking at the FIF rules via a 2007 IRD briefing paper and the following summary about ASX listed exemptions is given. Not sure what they are getting at here:

Investments in Australian-resident companies listed on an approved index
of the Australian Stock Exchange, such as the All Ordinaries index (the
500 largest listed companies), are exempt from the foreign investment
fund rules. The general income tax rules will continue to apply to these
Australian investments: that is, taxable only on dividends if the shares are
held on capital account and on dividends and realised share gains if the
shares are held on revenue account. However, investments in Australianresident listed companies held by portfolio investment entities are
generally taxable only on dividends.

Are the tax requirements on "revenue" account realised share gains mentioned above akin to the NZ process of paying tax if it was intended to sell for a profit at time of purchase - or is it pay tax on capital gains of Australian shares regardless of intent or reason e.g. compulsory takeover?

Any comments gratefully accepted.

I am planning to review all my structures with my accountant over the next week or so but am just interested in views/information prior to this i.e any comments accepted as all care and no responsibility.

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Originally Posted by impacman

Have just been loking at the FIF rules via a 2007 IRD briefing paper and the following summary about ASX listed exemptions is given. Not sure what they are getting at here:

Investments in Australian-resident companies listed on an approved index
of the Australian Stock Exchange, such as the All Ordinaries index (the
500 largest listed companies), are exempt from the foreign investment
fund rules. The general income tax rules will continue to apply to these
Australian investments: that is, taxable only on dividends if the shares are
held on capital account and on dividends and realised share gains if the
shares are held on revenue account. However, investments in Australianresident listed companies held by portfolio investment entities are
generally taxable only on dividends.

Are the tax requirements on "revenue" account realised share gains mentioned above akin to the NZ process of paying tax if it was intended to sell for a profit at time of purchase - or is it pay tax on capital gains of Australian shares regardless of intent or reason e.g. compulsory takeover?

Any comments gratefully accepted.

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Pretty much the same (just different terminology), & yeah all goes back to that very grey, murky area of "intent".

Again holding securities in two different a/c's is the easiest method to appease the IRD...

I've been doing it for years & never had a peep out of them :D

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Originally Posted by shasta

Pretty much the same (just different terminology), & yeah all goes back to that very grey, murky area of "intent".

Again holding securities in two different a/c's is the easiest method to appease the IRD...

I've been doing it for years & never had a peep out of them :D

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Thanks Shasta. Do the same myself but just had a moment of uncertainty. Pity nothing is black and white but thats the game. Will continue to do as I have been doing.:)

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Originally Posted by impacman

Thanks Shasta. Do the same myself but just had a moment of uncertainty. Pity nothing is black and white but thats the game. Will continue to do as I have been doing.:)

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I used to send in my spreadsheets, but they don't have the resources to fully audit them, & nor do they need to...

I dont bother now :D

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Hi Shasta,

Hope you have a moment to look at the following query.

If have two accounts, the first registered as a <Capital Acc>, and the second as a <Trading Acc>

If I then hold headshares of company X in my <Trading Acc> which then issues a set of free options in company X, I would then have two possibilities:

(a) exercise the options on or close two the expiry date (assuming they are in the money)

(b) At some point before expiry, sell the options for cash etc

In the case of (a) are there any tax implications simply due to the exercise process ?

In the case of (b) what will be the tax implications of the sale of the options ?

Finally, what would be the tax situation if the headshares and options were held in the <Capital Acc> ?

Your response to the above would be most appreciated.

Many thanks,

Zorba

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Originally Posted by zorba

.
Hi Shasta,

Hope you have a moment to look at the following query.

If have two accounts, the first registered as a <Capital Acc>, and the second as a <Trading Acc>

If I then hold headshares of company X in my <Trading Acc> which then issues a set of free options in company X, I would then have two possibilities:

(a) exercise the options on or close two the expiry date (assuming they are in the money)

(b) At some point before expiry, sell the options for cash etc

In the case of (a) are there any tax implications simply due to the exercise process ?

In the case of (b) what will be the tax implications of the sale of the options ?

Finally, what would be the tax situation if the headshares and options were held in the <Capital Acc> ?

Your response to the above would be most appreciated.

Many thanks,

Zorba

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Hi Zorba

If you held the shares in your trading a/c & received the free options, i would assume they become part of your trading portfolio & subject to tax on any gains...

If you held the shares in your capital a/c & later on sell the options, i would say these would be fine, as long as you don't trade the same securities or buy back what you sell, that muddies the waters somewhat.

Remember as an individual you have the benefit of accounting for transactions on a "cash basis", which means the options you received for free in your capital a/c are not required to be "valued" therefore if you allow them to lapse there is no tax benefit, but i assume thats far from your thinking!

Trading v investing is still a grey area which ultimately comes down to "intent".

I'm not trading anymore, but happily disclosed to the IRD when i was.

It doesn't pay to get clever,you will get found out & the statute of limitations does not apply if you have actively avoided paying tax!

Hope that clarifies your question?

Just a query, as I've only just started out and haven't actually lost anything yet, but can you claim losses with the IRD and if so, can you claim historical losses (ie last year or the year before)??

A similar situation to the above. I have a small loss from Forex trading, plus a few expenses related to setting up, 2nd hand computer, membership fess etc... for the 2010. Has anyone returned a forex loss before, and what is the likely IRD reaction?

Also I have been studying taxation as part of my diploma, and have come across the very grey area of share trading in relation to assessable income. Does anyone have any experience or know just what level of activity the IRD goes from it being 'not business' to being 'business'. Obviously buying and selling one or two shares a year won't interest them, but what about 10, or 20? Bearing in mind that I am talking from the viewpoint of a person who works full-time and does a bit of share-trading in their spare time. I know that if a persons full-time activity is share-trading then it is a business - it is when a persons full time income activity is something else (Say a Job) that things get tricky.

Cheers
Razor

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Originally Posted by RazorX

A similar situation to the above. I have a small loss from Forex trading, plus a few expenses related to setting up, 2nd hand computer, membership fess etc... for the 2010. Has anyone returned a forex loss before, and what is the likely IRD reaction?

Also I have been studying taxation as part of my diploma, and have come across the very grey area of share trading in relation to assessable income. Does anyone have any experience or know just what level of activity the IRD goes from it being 'not business' to being 'business'. Obviously buying and selling one or two shares a year won't interest them, but what about 10, or 20? Bearing in mind that I am talking from the viewpoint of a person who works full-time and does a bit of share-trading in their spare time. I know that if a persons full-time activity is share-trading then it is a business - it is when a persons full time income activity is something else (Say a Job) that things get tricky.

Cheers
Razor

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I would think if you claim losses and expenses then you will have to share profits with them.
Only buying a few shares a year,with the view of starting your on savings plan I would think you are in the clear.
Being awere of the problems of tax as a trader,may make us all a little bit more selective of the shares we buy.
A friend of mine has a business,and any shares he buys to trade he buys in the business's name,while the long term holds he buys in his own name.

I think shares and forex is different as forex is a financial arrangement. Any gain/loss would be taxable irrespective of whether you are a trader. You would need to be a trader to claim expenses though.

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Originally Posted by RazorX

A similar situation to the above. I have a small loss from Forex trading, plus a few expenses related to setting up, 2nd hand computer, membership fess etc... for the 2010. Has anyone returned a forex loss before, and what is the likely IRD reaction?

Also I have been studying taxation as part of my diploma, and have come across the very grey area of share trading in relation to assessable income. Does anyone have any experience or know just what level of activity the IRD goes from it being 'not business' to being 'business'. Obviously buying and selling one or two shares a year won't interest them, but what about 10, or 20? Bearing in mind that I am talking from the viewpoint of a person who works full-time and does a bit of share-trading in their spare time. I know that if a persons full-time activity is share-trading then it is a business - it is when a persons full time income activity is something else (Say a Job) that things get tricky.

Cheers
Razor

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In respect of shares: its all a matter of "Intention" when you purchased the shares, i.e. "did you INTEND to sell them for a capital gain. But Intention is very hard to prove, as the IRD readily admit.
Scout around the forum, Razor, and you will find that plenty has been posted at various times on this subject. It was interesting to note that, in preparing this year's Budget, Treasury had strongly advocated bringing in a "5-year rule", i.e. unless you held the shares for 5 years you would be taxed on any capital gain on sale. Thankfully the Government didn't go along with the idea. "Brightlining" was the description Treasury used - I can't for the life of me figure out why that term, but it is probably blindingly obvious to some.

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Originally Posted by COLIN

In respect of shares: its all a matter of "Intention" when you purchased the shares, i.e. "did you INTEND to sell them for a capital gain. But Intention is very hard to prove, as the IRD readily admit.
Scout around the forum, Razor, and you will find that plenty has been posted at various times on this subject. It was interesting to note that, in preparing this year's Budget, Treasury had strongly advocated bringing in a "5-year rule", i.e. unless you held the shares for 5 years you would be taxed on any capital gain on sale. Thankfully the Government didn't go along with the idea. "Brightlining" was the description Treasury used - I can't for the life of me figure out why that term, but it is probably blindingly obvious to some.

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You've pretty much answered your own question Colin: "Brightlining" because in contrast to the vague and murky "intention" test, a 5-year-holding test would provide a sharp division (or brightline) between investing and trading.

Anyone silly enough to delay 3 to 6 months before acting on TA Buy or Sell signals deserves a special punitive tax penalty!

No Belg! No No NO! The market NEEDS people like you. Who else would we sell our down-trending stocks to?

Hi Guys

Like many, I primarily invest on the asx in a mixture of small/med cap's mainly resource stocks.

I am not sure on the tax implications of what I am doing, I usually buy and hold, but do fiddle around the edges skim a few off when in need of cash or find another stock I'm interested in. Most of these not are in the ASX 200.

Am I liable to pay tax in NZ on unrealised capital gains on ASX small caps each year irrespective of weather I am a trader or longer term investor?

When I do sell a few shares for a holiday for example am I liable to pay tax if I made a profit on those shares?

Any info would be greatly appreciated

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Originally Posted by gonnfishing

Hi Guys

Like many, I primarily invest on the asx in a mixture of small/med cap's mainly resource stocks.

I am not sure on the tax implications of what I am doing, I usually buy and hold, but do fiddle around the edges skim a few off when in need of cash or find another stock I'm interested in. Most of these not are in the ASX 200.

Am I liable to pay tax in NZ on unrealised capital gains on ASX small caps each year irrespective of weather I am a trader or longer term investor?

When I do sell a few shares for a holiday for example am I liable to pay tax if I made a profit on those shares?

Any info would be greatly appreciated

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You sure as hell are if you tell the taxman you sold them to pay for a holiday! That is income. I don't know the technicalities of sharetrading, but I do know the advantages of being 'inventive".

So by the same logic if I sold at a loss to pay for a holiday I can claim a tax refund?

Is there a thread here that explains asx junior investing and the tax implications clearly?

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Originally Posted by gonnfishing

So by the same logic if I sold at a loss to pay for a holiday I can claim a tax refund?

Is there a thread here that explains asx junior investing and the tax implications clearly?

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If you are actively trading stocks, then yes any losses incurred can be claimed. If you are investing as an individual you only need to worry about actual cash transactions, for realised gains/losses, you do not need to worry about unrealised positions until you sell.

If you have a specific question - use this thread

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Originally Posted by gonnfishing

I am not sure on the tax implications of what I am doing, I usually buy and hold, but do fiddle around the edges skim a few off when in need of cash or find another stock I'm interested in. ...
Am I liable to pay tax in NZ on unrealized capital gains on ASX small caps each year irrespective of weather I am a trader or longer term investor?

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You need to determine if you are a long term or a trader. If you want to be both, keep both separate (ie. separate brokerage accounts). Gains on your shares bought (and sold) for trading will be taxable but if bought for long term should not be subject to tax. Mix the two together and they will all be taxable.

I know this thread is quite old, but I had a quick question about my tax implications:

I started investing in August 2013. I bought into Xero at $16 after hearing all the hype in the news. My question now is, if I wanted to sell these shares and buy in to a different company would I have to pay tax? and if so, what would the tax rate be? I am a university student, and I also have a part-time job (8 hours a week). Would it just be my income tax rate? 12%?

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Originally Posted by hummerh40

I know this thread is quite old, but I had a quick question about my tax implications:

I started investing in August 2013. I bought into Xero at $16 after hearing all the hype in the news. My question now is, if I wanted to sell these shares and buy in to a different company would I have to pay tax? and if so, what would the tax rate be? I am a university student, and I also have a part-time job (8 hours a week). Would it just be my income tax rate? 12%?

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What was your purpose when you invested. To ride the hype and earn a nice 'capital gain'?

Given the short time frame, on the face of it it would be taxable. The tax rate is your marginal tax rate so probably 10.5% since I dont think you pay ACC on share profits. http://www.ird.govt.nz/how-to/taxrat...etaxrates.html

I am not sure if you would have complete a IR3 or if there is a short cut method to advising IRD.

My view would be that realised capital gains on Xero shares up to this point would almost certainly be considered income by the IRD due to the fact that Xero has no dividend policy and is unlikely to pay a dividend in the foreseeable future. This would make it very difficult to claim that the shares were purchased for the income yield.
To avoid that tax it would be necessary to say you purchased them for the very long term dividends in the very distant future, but that some other factor has now changed your view of the company's prospects. Pretty unlikely to get away with this in my opinion.
.

Thank you for your replies, but in light of the current situation, I may just hold on to those Xero shares..

Only thing im abit confused about is with this link http://www.ird.govt.nz/how-to/taxrat...etaxrates.html say you earn 48k a year as a wage would any capital gain you make simply be taxed at 30% or do you divide that up among the progressive rates

Heres another but not the one I'm looking for. A couple of rare leftover posts from the redouble Phaedrus (please come back).

I wonder if hummer held onto his Xero shares from $16 dollars all the way up to $40+ then back to $16 again?!

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Originally Posted by tosspot

Only thing im abit confused about is with this link http://www.ird.govt.nz/how-to/taxrat...etaxrates.html say you earn 48k a year as a wage would any capital gain you make simply be taxed at 30% or do you divide that up among the progressive rates

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The total you earn is taxed as if earned from one source. So follow the progressive tax steps. e,g anything over 70k is taxed at 33%.
Here is a calculator that gives the answers.


http://www.ird.govt.nz/calculators/k...-tax-rate.html