US Shares - Taxation

[steve9]

Hi,

I was interested to know how the following positions gains would be taxed when closed - I assume they do not fall under the FIF rules?

a) Long Facebook (FB) Jan 15 2021 $220 Call Options

b) Short Uber (UBER)

Thanks.

[SBQ]

$220 strike price JAN15? What's the probability FB stock will be in the $ (higher than $220 by that time?) since you're betting it's current $190 stock price will be higher? In my experience the vast majority of options contracts expire worthless. The reality is no one would offer a option contract that would give the contract buyer an edge to profit, and hence most options expire with little or no profit; or more likely, you won't find any offering on the contract. Typically options pricing are better suited to stocks that have high volatility, but then typically, no one write contracts on such volatile stocks where the pricing is so in to the $.

FIF does not apply to derivative / options and hence why IRD/NZ Gov't has place regulation to deter or limit the investments in this area by NZ residents. The FMA states any foreign broker offering options contracts directly to NZ residents would be doing so illegally, without these brokers being licensed by the FMA (which none of them would bother). You could use a local NZ broker to play the options but i'm certain at a much higher cost and you would not be exempt from taxation on any of the profits made from derivatives. The whole idea of the FMA is that prior to this regulations, IRD had no form of taxation on those that made $ from options contracts conducted offshore. Since they were nothing more than contract terms and that the specific asset could not have a 'balance' account value at any specific day, this meant IRD could not directly tax it under FIF, nor could the overseas foreign brokers would comply to NZ regulations (or so IRD could keep tabs of NZ residents making $ from overseas accounts). Since the biggest player the USA is not part of the CRS (Common Reporting Standard where banks/brokers have to remit client information to the foreign tax authority by tax ID#), US brokers are simply ignoring NZ client or restricting their account by excluding derivative investments.

Shorting Uber shares directly is simplistic (providing your broker has a pool of shortable shares ; note not all brokers are the same and you'll find the NZ brokers most likely don't have access or an allotment of shares to allow for short position). In terms of FIF, an account balance is always determined during a short position so therefore, tax by FIF will still apply.

Here's an interesting thing to separate the individual investors vs the Kiwi Saver / NZ managed funds. Regardless of the managed fund's performance, FIF applies to the fund regardless on years they gained and on years they've lost value for their clients. While to the individual if they invested directly to the same foreign stock or ETF, on years where their portfolio goes negative, they can switch FIF to 'Comparative Value' method and no tax will be paid for that year. No financial seminar i've attended have provided me a direct answer why the NZ tax system has been so inequitable across the landscape of investments ; such as investing into real estate, Kiwi Saver, directly invested abroad, etc. There's no real level playing field whatsoever!!

[peat]

The FMA states any foreign broker offering options contracts directly to NZ residents would be doing so illegally, without these brokers being licensed by the FMA (which none of them would bother).

I've traded the occasional option series on an online trading platform recently so something is not quite right with your statement. They did require my NZ tax number so possibly are licensed or possibly they are classed as CFD's not options - but they are structured as true put and calls.

[SBQ]

I've traded the occasional option series on an online trading platform recently so something is not quite right with your statement. They did require my NZ tax number so possibly are licensed or possibly they are classed as CFD's not options - but they are structured as true put and calls.

From the horse's mouth: https://www.fma.govt.nz/contact/faqs/#Foreign

Why can’t I use an Australian regulated, European regulated, or US regulated foreign exchange provider?
You can, but it’s illegal for them to offer derivatives to retail investors in New Zealand without being licensed by us. If they are willing to break the law to get your business, it’s likely they will be cutting corners in other areas and you will have much less protection if things go wrong."

Spells clear to me. Most major brokerage firms provide some services in derivative & options trades. If not, even simple foreign exchange rate services will require the foreign brokerage firm to be licensed by the FMA despite the NZ client not having any access to these services.

[SBQ]

Also I should reiterate NZ does not have any depository insurance. That is $ in the banks are not insured in the case of bankruptcy. Whereas in Canada they have CDIC, and in the US they have FDIC (which insures balances up to $250,000 per account) and with brokers, they have SIPC covers up to $500,000. TDAmeritrade covers up to $1,000,000 for joint accounts.

So where is this FMA BS they're saying that investors $ is not safe in the overseas major brokerage houses or banks? It's not like people are sending money to Nigeria from a phone scam.

[peat]

I've traded the occasional option series on an online trading platform recently so something is not quite right with your statement. They did require my NZ tax number so possibly are licensed or possibly they are classed as CFD's not options - but they are structured as true put and calls.

From the horse's mouth: https://www.fma.govt.nz/contact/faqs/#Foreign

Why can’t I use an Australian regulated, European regulated, or US regulated foreign exchange provider?
You can, but it’s illegal for them to offer derivatives to retail investors in New Zealand without being licensed by us. If they are willing to break the law to get your business, it’s likely they will be cutting corners in other areas and you will have much less protection if things go wrong."

Spells clear to me. Most major brokerage firms provide some services in derivative & options trades. If not, even simple foreign exchange rate services will require the foreign brokerage firm to be licensed by the FMA despite the NZ client not having any access to these services.

The FMA states any foreign broker offering options contracts directly to NZ residents would be doing so illegally, without these brokers being licensed by the FMA (which none of them would bother).

Quite a few are licensed as it turns out, including the one I use.
https://www.fma.govt.nz/compliance/l...s%5B101%5D=101

Your statement implied there were none.

[SBQ]

Quite a few are licensed as it turns out, including the one I use.
https://www.fma.govt.nz/compliance/l...s%5B101%5D=101

Your statement implied there were none.

?? My statement is clear that NZ residents must trade via FMA's licensing scheme - that list if it is of any indication of how many brokers are licensed is insignificant to the global market share of brokers. Not one I can see that is US based.

What is apparent, FMA is telling investors that bogus or risky brokers overseas do exists.. yes I get that, in places like Zimbabwe. But over in the US, we see brokers that are bigger than ALL of the banks in Australia & NZ combined and offer real insurance protection to their clients.

[matty1]

Shorting Uber shares directly is simplistic (providing your broker has a pool of shortable shares ; note not all brokers are the same and you'll find the NZ brokers most likely don't have access or an allotment of shares to allow for short position). In terms of FIF, an account balance is always determined during a short position so therefore, tax by FIF will still apply.

Am surprised that FIF rules would apply to a short position. Is this correct? I would argue that at no time do you have "a direct interest in a foreign company" as defined by EX30 of the Income tax Act. When the broker closes out the short position the shares are returned to the broker's pool of shortable stock. One is never listed as the holder of the stock.

Also, if one was to say, go short in XYZ Inc in May 2017 at $1000 a share and cover in June 2020 at $100 a share, how exactly would that be taxed under FIF rules? With there being a margin loan, short borrowing costs, responsibility to pay dividends to the long party etc, and never actually owning the stock, surely it's more akin to a Financial Arrangement?

[swingtrade]

Hi guys,

I've recently returned (in Feb 2020) to NZ after about 14 years overseas and I am a very active US Options trader. I have an overseas company that I do these trades through, however thats going to be LTC (Look through company) so as SBQ notes I dont think that'll apply to me as I'm not trading on an individual basis - at least thats my surface level thought, the company will just become a resident for tax purposes or something. I have an accountant sorted, but just wondering anyone else got a few pointers before I go listen to "the professionals" waffle in terms of trading derivatives from NZ?

Any comments welcome!

[SBQ]

You should be aware that NZ has AML (Anti-Money Laundering Laws) & CRS (Common Reporting Standard). The reason is despite you have setup funds in the US, have you ever thought how those funds would end up - if they would be sent to NZ? How would you realise those profits and at the end of the day, how would you spend it or get access to it for consumption?

The AML basically means good record keeping for IRD. So when large amounts are wire transferred in or out of NZ, this is recorded and IRD will look to it in the case of a tax audit. CRS further enforces the tax requirement by foreign residents living in NZ. If you are a US citizen or green card holder, you would be under FACTA and the banks in NZ would be required for you to comply under FACTA - which is they report to the IRS of your bank balances etc (basically the same as CRS but for US citizens).

The term LTC seems interesting. When I studied tax in Canada, such an arrangement would hold no defense in the case of a tax audit. The key words is "control" - ie Cdn Controlled Private Corporation ; who are the directors, where were decisions made. There are also 'attribution' tax laws in Canada which prevents a person from moving funds from 1 hand to another via by gifting to a relative or spouse, without paying tax (the person that gifts the shares would still have to declare the dividend income on their tax return despite it being already gifted) - anyways, i'm not sure if NZ tax laws are that detailed but it's certainly something to think about it or talk with a NZ tax specialist.

If it can be proven you made trades via a company holding abroad, and the decisions made were made on NZ soil, it may be hard to dispute those profits were beyond your control and thus not taxable in NZ. In this day of age, tax depts have a wealth of resources they can go on, even looking at your ISP records and how and when you made those trades. It's scary as my wife was once audited some 15+ years ago and they knew she had a bank account in China and full record of her issued Visa card on all her purchases she made overseas while traveling. I'm certain information gathering is far more sophisticated today ; seeing how CRS and AML reinforces quite the evasive information gathering.

One thing certain, the US is not part of the CRS regime imposed by the OECD so privacy laws for US banks still hold.