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03.08.2018What tax obligations do day traders face?

This article will look at the average day trader's tax responsibilities and how traders can make sure they don't fall foul of the rules.


Day trading is a popular occupation in Australia, and there are lots of people across the country researching and building sustainable trading strategies which earn them a decent profit. A lot of this activity takes place on the internet, and for that reason there’s a sense among some traders that the traditional rules around taxation and legal obligations simply don’t apply.

But that’s not strictly true: the internet may in many ways be like the wild west, but when it comes to earning money it’s essential that traders pay their fair share of tax to the government. This article will look at the average day trader’s tax responsibilities and how traders can make sure they don’t fall foul of the rules.

A confusing world

Tax law in Australia is complex at the best of times, but when it comes to how the government sees day trading, it gets even more complicated. The Australian Tax Office (ATO) doesn’t issue clear guidance on the problem, so in many cases traders are left to try and work it out for themselves.

There are plenty of laws to regulate day trading, but the number of pages that stipulate rules can often stretch into four figures, which is simply too much for the average trader to be expected to read. Those who can afford hotshot accountants may fare a little better in this regard, but for the small-time day trader, it’s often somewhat impossible.

Do instruments matter?

In short, the answer to this is no. In the eyes of the Australian government, pretty much all trading instruments are seen as the same. However, it is worth pointing out that digital currencies are not considered foreign currencies in Australia, and they’re not regulated the same way forex might be. Instead, they’re seen as valuable assets, so the tax obligations may be different.

Trader or investor?

The most important question a trader needs to answer before they can even begin to work through this issue, though, is one of definition. Tax obligations from trading, for example, will depend on whether the trader is legally classified as a trader or an investor. Investors approach trading in an unsystematic way and trade to build a portfolio of assets which will rise in value over time. Traders, meanwhile, typically pick up an asset and then dispose of it relatively quickly with the aim of making a profit there and then – or, as it is known, “trading as a business”.

In modern times, there have been a series of cases in which the tax authorities have made it a bit more clear what they consider this to look like. Characteristics of a business trader may include a higher frequency of trades, an aptitude for trading which is clearly derived from experience, and well-organised record-keeping.

Seek advice

The tax someone will pay will as a day trader will depend largely on which of these two definitions they are classified as. Broadly speaking, investors pay capital gains tax on changes in asset value; traders, on the other hand, pay tax on income as normal. If a trader is unsure which of these they fall under, it’s probably worth speaking to an accountant or financial advisor. Not only will this ensure they don’t fail to pay a certain tax that they owe based on their activities, it will also guarantee they don’t miss out on any potential entitlements.

Day trading has plenty of advantages, but one of its major downsides is the total lack of clarity over a trader’s tax position. It’s often difficult to be certain what the Australian tax liability is for day traders, and the situation is made more confusing by the uncertainty some traders face over whether they’re a trader or an investor. The advice outlined here, however, can help someone in this position work out exactly what their obligations are.


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