Are you an investor or a business trader?
The ATO treats you either as a share investor or as someone carrying on a business of share trading. That one classification decides whether your profit is a capital gain or ordinary income, and whether a losing year can reduce the tax on your salary.
You do not elect into it. The ATO decides on the facts of how you trade, weighed together rather than on any single one of them, and you are the one who has to show those facts.
The two treatments differ on nearly every item. Hold shares as an investor and your profit on sale is subject to capital gains tax, with a 50% discount available if you owned them for at least 12 months before the sale. A capital loss offsets capital gains only, and it carries forward until you have a gain to use it against.
Hold shares as a trader and they are trading stock. Profit on sale is assessable as ordinary income. The purchase price of the shares and the transaction costs of buying and selling are deductible in the year you incur them, and a loss is deductible against income rather than trapped against future gains. The 50% discount is gone.
Criteria for trading as a business in Australia
The ATO publishes no trade count that turns an investor into a business. Courts have weighed a set of factors instead, and the ATO applies the same ones.
- The nature of the activity, and whether you carry it on to make a profit.
- The repetition, volume and regularity of your transactions.
- Whether you organise the activity in a business-like way and keep records.
Intent on its own is not enough. The ATO says the intention to make a profit does not, by itself, establish that a business is being carried on. What you did, month after month, is the evidence.
Volume, frequency, and regularity of trades
Repetition is the frequency of your transactions and the number of similar ones. The ATO puts it plainly: the higher the volume of your share transactions, the more likely it is that you are carrying on a business. It also expects a share trading business to buy shares on a regular basis through a regular or routine method.
Regularity does more work here than a single busy month. A year of steady trading to a written method reads differently from a burst of activity in January followed by nothing.
Swingfolio records the entry date, the exit date and the holding period of every position you log. If someone asks you to show the pattern of your trading across a year, it is already in one place and in date order.
Operating with a structured trading plan
Business-like organisation is one of the ATO's factors, and a written plan is the cheapest evidence of it. The plan says what you buy, how much you risk on a position, and what closes it.
Swingfolio holds those rules as strategies and attaches them to the trades taken under them. Each trade carries the stop and the number of units you chose, so the risk decision is recorded on the day you made it rather than reconstructed at tax time.
Tax implications: business status changes your tax return
Deducting trading losses against other income
As an investor, a capital loss has one job. It offsets a capital gain, and with no gain to offset it carries forward, possibly for years.
As an individual trading in your own name, the loss is deductible against your other income, salary included, once you clear the non-commercial loss rules. Two conditions apply. A company or a trust is taxed under different rules and this section does not describe them.
The first is the income requirement. Your taxable income, reportable fringe benefits, reportable super contributions and total net investment losses must add to less than $250,000 for the year.
The second is one of four tests, and passing any one of them is enough. Two turn on the trading result. The assessable income test asks whether the activity produced at least $20,000 of assessable income for the year. The profits test asks whether it made a tax profit in three of the past five years, counting the current one. The other two turn on the value of assets used in the business on a continuing basis: real property of at least $500,000, or other assets of at least $100,000. Check all four against your own position rather than stopping at the first two.
If you fail the income requirement, or pass none of the four tests, you defer the loss to a later year. The Commissioner has a discretion to allow it anyway, in limited circumstances.
Trading stock vs. capital assets
In a trading business your shares are trading stock, not capital assets. The ATO asks you to do a stocktake as close as possible to the end of each income year and value what you still hold.
Three methods are available for each item: cost, market selling value, and replacement value. You can use a different method in a different year, and a different method for different items of stock.
Record keeping and compliance for Australian traders
The ATO is direct about what missing paperwork costs you. Failing to keep records of your share transactions makes it difficult to establish that you were carrying on a business of share trading. The general retention period for business records is five years.
The reason behind a trade fades faster than the numbers do. Swingfolio asks for a reflection when you close a position, so what you were thinking is captured on the day instead of guessed at in July.
ATO reporting with Swingfolio
Swingfolio builds Australian CGT and US tax reports from the trades you have logged, so an ASX holding and a US holding land in the same year-end workflow. Each converted figure shows the exchange rate used, the dates behind it, and where the rate came from.
Proving commercial viability with analytics
Swingfolio generates a performance review of the previous week's closed trades when you ask for one, and it keeps the reflections you wrote at the time.
Neither settles your classification. Both are the dated, business-like record the ATO's factors describe, and they accumulate whether or not you remember to sit down and create them.
Case study: from investor to swing trading business
The following example is hypothetical and uses round numbers.
Alex works full time and trades around 30 times a month, holding positions for about 10 days. In a poor year he loses $5,000 across his trading and spends $2,000 on software and data.
As an investor, that $5,000 is a capital loss. He cannot use it until he makes a capital gain, which may be several years away.
As a share trader, the $5,000 is deductible against his salary, provided he meets the income requirement and passes one of the four tests. The costs of running the activity are deductible in the year he incurs them.
Alex sizes each position with the position size calculator before he places the order, which is what keeps a losing run from ending the activity his tax position depends on.
Common pitfalls
A wash sale is a disposal where your economic position barely moves. You sell at a loss and buy back the same asset, or one substantially the same. The ATO has published a taxpayer alert on these arrangements. Where the dominant purpose was the tax benefit, the Commissioner can cancel that benefit under the general anti-avoidance rule, and penalties can follow.
Lack of consistency and documentation
If the ATO reviews your returns and finds you claimed losses incorrectly, you may be liable for penalties. The defence is a contemporaneous record of what you did and why, which is worth more than any argument assembled after the review letter arrives.
Professionalising your trading for tax
You give up the 50% CGT discount. In exchange you get deductions in the year you incur them, a loss that can reach your salary income, and a higher standard of proof about how you trade.
That standard is met with records, not intentions. Talk to a registered tax agent who works with share traders before you lodge on this basis, because the answer turns on facts specific to you. This article is general information and not tax advice.
Start logging your trades in Swingfolio so the dates, the rules and the reasons exist before anyone asks for them. Start tracking your trades.