How to lodge a tax return if you invest in shares

Find out how you can claim losses as a tax deduction if you own shares.

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If trade shares casually or if you meet the Australian Tax Office definition of a professional share trader, you can claim tax benefits such as franking credit rebates and deductions on trading-related costs.

The ATO defines a share trader as, "a person who carries out business activities for the purpose of earning income from buying and selling shares.”

Regular investors are taxed differently; while traders can claim losses on the market as a tax deduction, but if you’re an investor, your losses are deducted from your capital gains only.

The ATO assess individuals on a case-by-case basis. Factors such as whether you have a business plan, how often you trade and the way you do it all play a part in the ATO’s decision. This page gives an insight into how the ATO classifies traders and investors and the tax implications of either classification.

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How does the ATO classify share traders and share investors?

The ATO defines a business for tax purposes as any money making venture where you’re not an employee. Share trading fits this definition; however, there are no black and white rules about who is a share trader and who isn’t. The ATO gives some guidelines but ultimately makes decisions on a case-by-case basis.

The ATO assesses the nature of your trading activities when deciding to classify you as a share trader or investor. This involves whether you’re trading regularly, how much you trade and whether this is comparable to other share traders.

The ATO also looks at your business or trading plan. This should include information such as why you’ve decided to hold and sell shares, in addition to your assessment of potential investments.

What are the tax implications of share trading?

If you can satisfy the ATO’s definition of being a share trader, you can claim any gains from the share market as your personal income and any losses as a tax deduction. Share investors need to pay attention to Capital Gains Tax (CGT) and the timing of the sale of shares. Any profits made after June 30 won’t be taxed until the following year.

Tax deductions

Share traders

  • Money from the sale of shares and share dividends are included in assessable income.
  • The costs of buying and selling shares can be claimed as a tax deduction.
  • Share traders can claim the costs of items such as computers, as they are necessary to making trades and keeping records. You can also claim depreciation on items costing more than $300.

Share investors

  • Can’t claim the purchase price of shares as a tax deduction.
  • Capital losses are subtracted from capital gains.
  • Any net profit is subject to CGT.
  • Can claim deductions on the prepayment of expenses such as internet fees, seminars or subscriptions for up to 12 months in advance.

Capital gains tax (CGT)

Share investors must pay CGT on any capital gains from investments. The CGT is based on a number of factors such as how long you’ve held the investment and your tax rate. If you’re considered a share investor rather than a share trader, you can benefit from a 50% reduction of the CGT rate if you’ve held your shares for more than 12 months. Also note the timing of the sale of shares and the effects of making a capital gain or loss before or after June 30.

What are franking credits?

Franking credits can be used by shareholders as a tax break on share dividend payments. Franking credits stop dividend payments from being taxed twice and can be claimed as a tax refund by shareholders depending on the shareholder’s marginal tax rate.

You can read more about franking credits in our comprehensive guide.

How does the tax office define a trader?

Tax implications are different for traders and investors. The ATO will classify you as a trader if you can answer yes to the following:

  1. You purchase shares on a regular basis in a routine way. The ATO will also look at the volume of shares traded and the size of the investment(s).
  2. You have a trading plan. The ATO will look at whether you have a registered business and whether you have business premises and all the relevant qualifications and licences.
  3. You make use of share trading techniques, such as market analyses.
  4. You have a Plan B in case your shares run at a loss.

What is a share trading plan?

You have a share trading plan if you can answer yes to the following:

  1. You carry out analyses of future investments.
  2. You look at the market to identify areas of potential gain.
  3. You make a decision to buy or hold shares based on future value.

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