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Share trading - capital loss or income loss?

Discussion in 'Accounting & Tax' started by thesuperman, 11th Jul, 2015.

  1. thesuperman

    thesuperman Well-Known Member

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    If you are classified as a trader & buy some stock options & they expire worthless the same financial year that it was bought, will this be a capital loss or income loss?
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    My understanding is if you're classified as a trader, it would come off income.
     
  3. thesuperman

    thesuperman Well-Known Member

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    That's what I was thinking too, but it would be good to hear from other traders out there or anyone with an accounting background.
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If you are a share trader then the loss for example will not automatically offset other income. You must satisfy some tests for that to occur.

    If you understood how income is calculated and reported by a true share trader then you would also revalue at 30 June to market and unrealised profits on changes in value are also taxable within the year. There may be strategies based on share valuation that could be used also.

    An isolated transaction on stock options that expire / lapse doesn't seem like a share trader activity. Share traders tend to turn options regularly.
     
  5. thesuperman

    thesuperman Well-Known Member

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    No opportunity to sell that option if you buy a small parcel at 0.1c but the market didn't go up & then there's no buyers at 0.1c & you can't sell the options for free :)

    Why would you revalue your portfolio at 30th June to market & pay tax on unrealised profits? That seems strange. It could end up being a loss by the time you sell those shares. The market might tank badly on 1st July and you sell at a big loss but are up for paying tax on 30th June unrealised profits. Why isn't this done with property too then on unrealised profits or managed funds?
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Man of Steel... A share trader is a business. A business schedule in a tax return. Share traders must use the trading stock basis to calc P&L. If their BHP shares go from $40 to $60 they pay tax on the $20 profit in that year and when they drop to $15 then next year they make a loss etc...Mark to market is how they usually pay tax...But they can choose individual methods to value...eg value their BHP shares at market one year or cost another. The only catch is the value used for closing stock in one year must be used to value opening stock the next. (Manipulation / avoidance rule)

    So in the above example of BHP in year one use cost as basis for valuation. In year two use market value.

    The ordinary income rules described above are old tax & common law concepts that predate CGT by decades.

    In respect to why IP owners...
    1. Most IP owners are passive investors. CGT assets.
    2. To be classified as a rental business you need it to be a FT venture with substantial indicators of such. If you do then any ownership % may be ignored and you may have a joint partnership with wife etc. Its complex. 5-10 properties unlikely to do it. ATO view uses an example of 26 IPs incl blocks of apartments. https://www.ato.gov.au/individuals/...3-14/?page=5#Part_carrying_on_rental_prop_bus
    3. A IP owners doesn't seek to make annual profit. They seek income (rent). The profit of growth is a mere realisation of a CGT asset. The CGT laws specifically don't tax on that basis and use a concept referred to as CGT events. A common CGT event is a sale.
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Lapsed options
    1. Revenue loss for a trader...Non-commercial loss tests apply to business loss. Hard to see how anyone with one trade is a trader.
    2. CGT event....CGT losses may offset other CGT gains or carry fwd to offset future cap gains
     
  8. thesuperman

    thesuperman Well-Known Member

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    Thanks for your very detailed answer. Reading it sounds very complex indeed.

    In regards to lapsed options if a share trader trades shares & the occasional options say 3-4 options all for a profit except the one that expired worthless, I presume this would be considered a revenue loss then.
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Only if they are a share trader. What are they ? Are you sure?