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When are you classified a trader for tax purposes?

Thursday 24th January 2002

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Q: What frequency of buying and selling shares would raise questions from the IRD as to whether you are an investor or a trader?

A: This is a commonly asked question and one of the best answers I have seen was posted by Mike Hudson on the ShareChat Forum some time ago.

"The individual investor will not be taxed on share market dealings unless the Inland Revenue classes you as a "trader" The question is what is the difference between an investor and a trader? The key criteria would appear to be;

  1. What was the purpose of the investment? If you bought the shares to sell and clear a quick profit e.g. in a stagging situation you could be classed as a trader.

  2. If you buy and sell on a regular basis you could also be classed as a trader. Under the current regime a small player would be exceedingly unlucky to come to the attention of Her Majesty's Tax Inspectors. There is of course the other side of the coin: in a falling market it may be advantageous to be classified as a trader as losses would be tax deductible."

Another golden rule to remember is that if you file a tax return as a trader for one financial year the IRD will treat all your share investments from then on as trading, i.e. once a trader always a trader (for tax purposes).

As each individual's circumstances are different it is best to talk to a specialist tax accountant. There are no exact definitions and the IRD views each taxpayer on a case by case basis. For example, if you had brought and 'stagged' Telecom, Contact and Auckland Airport shares in the IPOs and those were the only shares you had ever brought and sold, then the IRD would probably class you as a trader. But if you had purchased the TEL, CEN & AIA shares in the respective IPOs and held them for several years, only selling them to use the proceeds to purchase a house, then you would not be classed as a share trader.

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