Trading vs investing

[Indy kiwi]

My understanding is that profits from trading in stocks on the NZX is taxable but profits from long term investing are not. Where does the IRD draw the distinction between these? Thanks for your help.

[Halebop]

Hi IK,

Your intention to earn an income from the investment is what decides the trading versus investing tax question. But the real arbiter is your pattern of behaviour... Everyone says they bought the shares for the dividends and the house for the rental income but if you have a pattern of buying and selling in a manner more consistent with the business of trading, your argument is likely to fall on deaf ears.

[Steve]

Hi IK,

Your intention to earn an income from the investment is what decides the trading versus investing tax question. But the real arbiter is your pattern of behaviour... Everyone says they bought the shares for the dividends and the house for the rental income but if you have a pattern of buying and selling in a manner more consistent with the business of trading, your argument is likely to fall on deaf ears.

It helps if you keep comprehensive notes to support your decisions to buy or sell to show that you are making an 'investment' decision rather than a 'trading' decision...

[lou]

If you purchased ETFs (PIE investments) and had a trading behavior would you be branded as a trader and have to pay tax? Or is there an exemption for tracking funds or PIE's?

[Lizard]

Just came across a good link on this topic - 2008, but does summarise case law to that point:

http://www.bellgully.co.nz/resources...oday_Jul08.pdf

Implications

The Court of Appeal’s decision should provide comfort to taxpayers who invest in shares for the longterm but engage from time to time in one off purchases and sales. This case appears to accept thatsome level of price speculation is permitted within a share portfolio without the investor taxpayer beingtreated as share dealing.


One key lesson from this case is the importance of maintaining a record of the rationale for individualshare sales and purchases within a broad portfolio. Some of the transactions in this case would at firstglance seem to be share dealing but Mr Cloake’s detailed explanations were enough for the Court tosee the transactions in a different light.



It is worth emphasising that, because of a lack of evidence, the Court could not consider whether any ofthe Kings’ shares were purchased for the purpose of resale under section CB 4. It is possible that inother cases the focus might shift to evaluating each share transaction separately under section CB 4,instead of the more general sections CB 1 and CB 5. If Inland Revenue could meet the basic level ofevidence required by the Court (which may simply be pointing out which transactions were seen asassessable), the onus would then shift to the taxpayer. In the case of a portfolio of shares, the taxpayerwould need to prove the case on every individual share sale which would be a formidable task withoutproper records.