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What is Tax on Shares: Tax Implications on investing and trading shares

April 30, 2024

If you have recently gotten into buying or selling shares, then it's important you understand how it affects your tax return as well as understanding the Capital Gains Tax (CGT).

CGT is a tax the Australian Taxation Office (ATO) applies to any capital gains you have earned when disposing of an asset, whether it's shares, bitcoin or the family home. It works by treating any Capital Gains as taxable income in the financial year you sold it. You can offset losses against gains and carry capital losses forward to offset future gains.

Unfortunately, understanding how taxes work on shares isn't simple, which is why taking professional financial advice is wise. The most important thing to remember for your tax return is that you keep detailed records of all income and transactions. You will need a record of sales, a record of purchases, divided statements, annual documents, and records of reinvested dividends.

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Tax On Selling Shares

If your sale of shares came at a profit, then you need to pay taxes. The profits you earn from selling shares are classified as part of your taxable income. If you earn a salary income of $47,000 annually and you earn $3,000 from trading shares, then it takes your total taxable income to $50,000.

Dividends also become part of your total taxable income. However, the ATO will already have a record of these and automatically add it to your total income. To clarify, your profits from shares aren't taxable until you sell them. If you sell them prior to 30 June the profits would fall into that financial year, but into the next, if you sell them after 30 June.

It is important to note that your tax implications are different if you class yourself as a share trader for business purposes. In this case, you can claim the losses as a tax deduction.

Of course, trading stock can be more complicated than this. For casual investors, you calculate your total profits from your total losses.

If, for example, you purchase 1,000 shares from Company A for 70 cents each and sell them for 80 cents each the same year, you have earned a taxable profit of $100.

Buy Company A: 1,000 shares x $0.70 = $700

Sale Company A: 1,000 shares x $0.80 = $800

Results Company A: $800 (sale price) - $700 (buy price) = $100 profit

But if you purchased 1,000 shares from Company B for 70 cents each in another company and this dropped to 50 cents for the value of the share at the time of sale; this would be a loss of $200.

Buy Company B: 1,000 shares x $0.70 = $700

Sale Company B: 1,000 shares x $0.50 = $500

Results Company B: $500 (sale price) - $700 (buy price) = -$200 profit

At the end, from both share transactions, your total capital loss would be $100 since you won $100 with the shares from Company A but lost $200 from the sale of the shares from Company B.

$100 (Company A) - $200 (Company B) = $100 Capital Loss

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Share Investing And Share Trading

Share Investing Versus Share Trading

Investing and trading are two different aspects of the financial market with the end goal being to make money. Essentially, investors tend to purchase and hold onto bigger returns for a longer period of time while traders generally operate short-term and take advantage of falling and rising markets to generate profits fast.

Here are the key differences:

If you are an investor:

Investors hold shares as assets, which means they are subject to CGT upon sale.
Investors' costs such as market costs, advisory fees, or commissions, are taken into account when shares are sold.
Share investors can use a capital loss to offset gains, but they cannot offset income that stems from another source.
Investors earn income from dividends and similar.

If you are a trader:

Share traders treat shares like trading stocks in a business.
Share traders treat gains as ordinary income.
Traders' losses and costs are deductible expenses in the financial year they are incurred.

Tax Deductions For Share Traders And Share Investors

There are several differences between the tax deductions for investors compared to those for traders.

Trader

Income from the sale of shares and dividends is classed as assessable income.
Having high levels of repetition, volume and regularity in your trades would qualify as carrying on a business.
The costs of buying/selling shares are tax deductible.
Traders can claim the cost of certain items if they are necessary for trading and record-keeping. For example, a computer. Traders can also claim depreciation on high-ticket items over the cost of $300.

Investor

The purchase price of a share cannot be claimed as a tax deduction.
Capital losses are offset against capital gains.
Profit is subject to CGT.
Deductions can be claimed against prepayment of expenses 12 months in advance (seminars, internet fees, subscriptions, etc)

Learn more with our guide to Division 7A.

How To Calculate Tax On Shares

How much tax you pay on shares will depend on your total taxable income as this will determine which tax bracket you fall into. Using the $50,000 total taxable income as an example – this covers two different tax brackets, amounting to a total of $6,717 in taxes. The standard tax rate of 19% applies for earnings between $18,201 and $45,000 and for the additional $5,000, a marginal tax rate of 32.5%.

How you are taxed on share profits also depends on how long you have held the share. For example, if you hold it for less than 12 months you will pay the appropriate tax rate on the full profit amount. Whereas, if you hold onto the share for over 12 months you would only pay the tax rate on half the value of the shares. In a situation with joint shareholders, the tax is split between parties.

How To Lodge A Tax Return For Shares

You know you need to pay tax on share trading in Australia, but how do you lodge the tax return? You don't need to file separately. When you lodge your tax return, you report the capital gains you have earned throughout the financial year. The ATO automatically adds dividends to your taxable income, but you should receive a tax statement detailing your total profits from your share trading platform or broker. You can forward these statements to your accountant or use the information to lodge your own return. If you use more than one platform or broker, you should use a system to track your gains across a portfolio.

Tax Implications Of Share Trading

If you are classified as a share trader by the ATO, you can claim gains as personal income and losses as a deduction. For regular investors, losses are offset against capital gains only. A casual investor cannot claim losses and it is particularly important they pay heed to CGT and adequately time the sale of shares. If you sell after 30 June, your profits will be taxed in the following year.

QuickBooks Can Help

Whether you need help with your business activities or tax in Australia, QuickBooks tax software can help you keep clear records and stay organised. QuickBooks Software can cover accountancy, tax simplicity, cash flow management, invoicing, payroll, and so much more. It can even integrate with existing apps to make life simple.

While every care has been taken to ensure the accuracy of the information presented as at 12 April 2024, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.

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What is Tax on Shares: Tax Implications on investing and trading shares

FREE Business Health Check

Tax On Selling Shares

Grow Your Business with QuickBooks

Share Investing And Share Trading

Share Investing Versus Share Trading

If you are an investor:

If you are a trader:

Tax Deductions For Share Traders And Share Investors

Trader

Investor

How To Calculate Tax On Shares

How To Lodge A Tax Return For Shares

Tax Implications Of Share Trading

QuickBooks Can Help

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