Trading vs Investing

Many of us hold shares. Not all of us however are share traders. So how do you know whether you are a share trader or a share investor?

Well there is not usually a definitive yes or no; whether an entity is trading or investing is often subject to some elasticity. The ATO however have certain qualifiers which they use to determine the difference.

Some of the questions they consider include:

• Is the entity seeking to make a profit? Of course it is the goal of most people to make a profit, so the ATO need more proof than that to justify an entity being called a trader.
• How regularly is the entity buying and selling shares and what is the volume of shares transacted? Someone who might buy $5000 worth of shares a couple of times a year and maybe sell one lot a year can hardly be said to be making a business out of the shares. On the other hand someone buying a new lot of shares every week and selling as often clearly would be.
• What was the reasoning and purpose behind the share purchase? It is a common thing for investors to purchase shares to receive dividends, and hold for the long term. Though they may make a large capital gain that is not their sole purpose from buying. Traders on the other hand may make a purchase with the clear intention on making as much gain in as little time as reasonable, and any dividends picked up are bonuses.
• What is the timeframe on buying and selling shares? Traders like to get in and out of trades reasonably quickly, although this will vary trade to trade, and one trade can go many months. Investors on the other hand can hold shares for many years without selling.
• What sorts of records are being kept to do with the transaction of the shares? All businesses need to keep good records. Therefore if you want to convince the ATO that you are in the business of share trading, it’s a good idea to keep good records. Records of share analysis and financial reports as well as your own tax records are good examples of this.
• How much money is being involved? Both traders and investors can involve large amounts of money, but if an entity is regularly pumping large amounts of money in to buy more shares, and then reinvesting profits, on a regular basis then this behaviour mimics the behaviour of a trader.

So there are a number of things that we can look at in making that judgement call. Sometimes a case can be built either way, so it then comes down to having a solid argument to defend for if the tax office ask questions about it. Next time that I get on here, I’ll write about some of the advantages of being treated as a trader or investor so you can see the difference in each.