Starting out - tax nonsense

[theArtfuldodger]

Hey guys!

I'm quite possibly the biggest noob on this forum so please, bear with me.

I'm only a second year accounting student (19yo) and my studies have got me interested in the sharemarket and investment (I knew very little about any of this stuff until a year or so ago). I have very little capital (I'm working on this), so I'm using this time to get into some theory, literature etc on these topics. So far it has proved very exciting!

I've trawled through the information on this forum (all extremely helpful, this forum is great!) to find information on the various taxes (IRD site = impossible to decipher) and this is my summary:

Capital gains:

- As a trader (short-term profit orientated) = capital gains are taxed (on realization);
- As an investor (long-term) = no capital gains tax;

Dividends:

- Are taxed (what rate in NZ?) depending on imputation (not 100% sure how this works?).

General:

- Until my income exceeds 70k, I am better off trading as an individual, rather than using a company structure because of the lower tax rate for individuals (until this threshold is breached) and unrealized capital gains do not have to be disclosed/taxed.

Questions:

- What is the deal with capital gains and FIF's?
(also - MEGA NOOB QUESTION - I take it a FIF is simply a fund used for the purpose of investing offshore?)

- Can brokerage fees be used to offset tax liability (in the case of trading)?

- Are company set-up costs, buying equipment (I'm talking stationary here) all tax deductible? (because my capital base is so small and brokerage fees so high (relatively), I'm afraid of any profits being wiped out, so I want to claim as much as possible).

- If I borrow (not substantially), the interest I am charged is tax-deducitble?

- Is this general summary correct?

I'm planning on building up some capital these summer holidays (small amount, ~6k) and spending my free time researching viable investment opportunities and paper trading before beginning trading next financial year.

Thanks! Feel free to destroy any noobish misunderstandings!

Also, as a side issue, could someone please briefly explain each of the following technical analysis measures:

- RSI
- Bollinger bands
- Stochastics
- The significance of volume

And...

- Are standard deviation channels really than useful? Do the assumptions in statistics hold true (95% of all values within 1.96 s.d., 90% withing 1.645 etc)? Surely they don't (line of best fit is not the average)?

Thanks (sorry if this is a huge pain in the ass).

[shasta]

Hey guys!

I'm quite possibly the biggest noob on this forum so please, bear with me.

I'm only a second year accounting student (19yo) and my studies have got me interested in the sharemarket and investment (I knew very little about any of this stuff until a year or so ago). I have very little capital (I'm working on this), so I'm using this time to get into some theory, literature etc on these topics. So far it has proved very exciting!

I've trawled through the information on this forum (all extremely helpful, this forum is great!) to find information on the various taxes (IRD site = impossible to decipher) and this is my summary:

Capital gains:

- As a trader (short-term profit orientated) = no capital gains tax;
- As an investor (long-term) = capital gains are taxed (when realized).

Dividends:

- Are taxed (what rate in NZ?) depending on imputation (not 100% sure how this works?). Imputation credits on dividends are taxed at the company rate of 30%, your own marginal tax rate will determine if you have any further tax liabilities

General:

- Until my income exceeds 70k, I am better off trading as an individual, rather than using a company structure because of the lower tax rate for individuals (until this threshold is breached) and unrealized capital gains do not have to be disclosed/taxed. Correct.
$70k is the 38% tax threshold, the company tax rate is 30%, which equates to roughly $39k for an individual
Questions:

- What is the deal with capital gains and FIF's?
(also - MEGA NOOB QUESTION - I take it a FIF is simply a fund used for the purpose of investing offshore?) FIF referes to investments outside the 7 (or 8 now?) countires with double tax agreements. You might want to search the threads in this section for the links provided to others.

- Can brokerage fees be used to offset tax liability (in the case of trading)? Yes

- Are company set-up costs, buying equipment (I'm talking stationary here) all tax deductible? (because my capital base is so small and brokerage fees so high (relatively), I'm afraid of any profits being wiped out, so I want to claim as much as possible). Yes, but i wouldn't go the company way just yet. Don't complicate things until you really do know what you're doing. Remember the 33% tax rate kicks in at 40k, a company pays 30% from the first $1!

- If I borrow (not substantially), the interest I am charged is tax-deducitble? Yes, if you are trading

- Is this general summary correct?

I'm planning on building up some capital these summer holidays (small amount, ~6k) and spending my free time researching viable investment opportunities and paper trading before beginning trading next financial year. Good idea, get a feel for it & read & learn what you can from others mistakes

Thanks! Feel free to destroy any noobish misunderstandings!

Also, as a side issue, could someone please briefly explain each of the following technical analysis measures: I'll let the TA folk help you here, i use FA primarily.

- RSI
- Bollinger bands
- Stochastics
- The significance of volume

And...

- Are standard deviation channels really than useful? Do the assumptions in statistics hold true (95% of all values within 1.96 s.d., 90% withing 1.645 etc)? Surely they don't (line of best fit is not the average)?

Thanks (sorry if this is a huge pain in the ass).

Nope, keep asking questions - welcome to Sharetrader

[newbietrader]

Capital gains:

- As a trader (short-term profit orientated) = no capital gains tax;
- As an investor (long-term) = capital gains are taxed (when realized).

Now I'm confused. I read somewhere in the thread it's the opposite.

[shasta]

Capital gains:

- As a trader (short-term profit orientated) = no capital gains tax;
- As an investor (long-term) = capital gains are taxed (when realized).

Now I'm confused. I read somewhere in the thread it's the opposite.

No, your right - it IS the wrong way around

[Jay]

No, your right - it IS the wrong way around

To be precise it is tax on the income earned- i.e the income is from the increase in capital, but is not a capital gains tax

[theArtfuldodger]

Thanks for the reply Shasta! I've read a lot of your posts on other threads too. Very informative and helpful. Thank you!

To: newbietrader

Hey yeah sorry about that! I had it the wrong way round (I meant the opposite ><). I'm a noob too!

Any TA's provide any assistance on the other Q's?

"Also, as a side issue, could someone please briefly explain each of the following technical analysis measures: I'll let the TA folk help you here, i use FA primarily.

- RSI
- Bollinger bands
- Stochastics
- The significance of volume

And...

- Are standard deviation channels really than useful? Do the assumptions in statistics hold true (95% of all values within 1.96 s.d., 90% withing 1.645 etc)? Surely they don't (line of best fit is not the average)?

Thanks (sorry if this is a huge pain in the ass)."

Thanks friends! =)

[shasta]

Thanks for the reply Shasta! I've read a lot of your posts on other threads too. Very informative and helpful. Thank you!

To: newbietrader

Hey yeah sorry about that! I had it the wrong way round (I meant the opposite ><). I'm a noob too!

Any TA's provide any assistance on the other Q's?

"Also, as a side issue, could someone please briefly explain each of the following technical analysis measures: I'll let the TA folk help you here, i use FA primarily.

- RSI
- Bollinger bands
- Stochastics
- The significance of volume

And...

- Are standard deviation channels really than useful? Do the assumptions in statistics hold true (95% of all values within 1.96 s.d., 90% withing 1.645 etc)? Surely they don't (line of best fit is not the average)?

Thanks (sorry if this is a huge pain in the ass)."

Thanks friends! =)

No problems

Did you find the links in the Newbie section regarding, FIF & FDR?

I found my old post, heres the link

http://www.sharetrader.co.nz/showthread.php?t=6220

[theArtfuldodger]

I sure did Shasta, thanks! The link concerning FDR is broken however.

Thanks for all your help!

Oh and another q:

I've got this program (a Yahoo! widget - it uses info. provided in relative real-time from Yahoo! Finance) which tracks capital gains on stocks. It allows you to specify your portfolio (purchase price, quanitity) and then tracks you capital gains based on real market movements. My question is thus: how artificial is this in terms of using this program as a means of paper-trading? Am I right in treating the program with the following cavets in mind:

1) The ease of 'cancelling' a stock from the portfolio is pretty artifical considering in a real market there is no guarantee than another trader will be there to accept your sell order (IE - in the real world, losses could potentially be greater because I may have to sell lower to actually sell, as oppose to just hitting 'cancel' and not losing anymore value).

2) I obviously dont have all the mechanics of a broker/brokerage service to navigate etc (I dont know how relevant this is, I have no experience with DIY brokerage services - planning on getting some soon).

3) ... Anything else?

All this said, 'paper trading' would have the same limitations I have identified. I'm not too worried atm, because currently I'm just focusing on getting a feel for the market and learning to identify worthy investments. But is there anything else? Is using this 'widget' (sounds pretty dodgy, but it is accurate) advisable? Just makes things easier.

Thanks.

[shasta]

I sure did Shasta, thanks! The link concerning FDR is broken however.

Thanks for all your help!

Oh and another q:

I've got this program (a Yahoo! widget - it uses info. provided in relative real-time from Yahoo! Finance) which tracks capital gains on stocks. It allows you to specify your portfolio (purchase price, quanitity) and then tracks you capital gains based on real market movements. My question is thus: how artificial is this in terms of using this program as a means of paper-trading? Am I right in treating the program with the following cavets in mind: Use it as a guide only, your learning at this stage

1) The ease of 'cancelling' a stock from the portfolio is pretty artifical considering in a real market there is no guarantee than another trader will be there to accept your sell order (IE - in the real world, losses could potentially be greater because I may have to sell lower to actually sell, as oppose to just hitting 'cancel' and not losing anymore value). Even though you are paper trading you are using real time data, as if you were placing a bid into the market. Dont get too hung up on this.

2) I obviously dont have all the mechanics of a broker/brokerage service to navigate etc (I dont know how relevant this is, I have no experience with DIY brokerage services - planning on getting some soon). I was with ASB Securities, they have all the necessary tools to DIY, but there are others, find a broker that offers you exactly what you require, there are plenty of good ones that offer cheap DIY services.

3) ... Anything else? Nope, keep firing the questions thru, we all started somewhere, & there are plenty of respected posters on here that will help.

All this said, 'paper trading' would have the same limitations I have identified. I'm not too worried atm, because currently I'm just focusing on getting a feel for the market and learning to identify worthy investments. But is there anything else? Is using this 'widget' (sounds pretty dodgy, but it is accurate) advisable? Just makes things easier. Just focus on getting comfortable with the way the market works, google & find all the links you need (or ask), when you start off with limited capital, your priority should be capital protection, rather than chasing the next hot spec...

Remember it costs nothing to paper trade, & the research you can do in the meantime & can set you up for later on.

Ie, what sectors are you interested in, do you know any sectors thru your interests, download the free incredible charts software & play with it.

Thanks.

I would encourage you to write down your goals, & what aspects you want in a company you are investing into. By writing down what you want & sticking to it, you can eliminate the emotion out of your decisions.

I've always found this part hard, greed & fear runs rampant in the market!

[theArtfuldodger]

Thanks Shasta. All your help has been really great. Never fear! My questions will keep flowing!

I was just telling Phaedrus you two should write a book. People would pay damn good money for this advice! =D

Anyway, cheers! =)