Stock investing can be a means to build wealth and financial security. As a stock trader, you need to understand your claim tax benefits and deductions on trading related costs. It is also essential to understand how taxes on stocks could affect your tax bill. Without a clear understanding of these, you may fall short of your tax obligations. The penalties for this can fall heavily on your pocket.
In this article, we’ll give you a quick guide to taxes on stocks and how you can lower those taxes. There are a few terms you first need to understand.
Capital Tax Gains
If you have stock takes in a regular brokerage account, you may need to pay CGT or Capital Gains Tax on any profit you’ve made from stock trading during the year. There are two types of Capital Gains Taxes:
1. Short Term Capital Gains Tax
These are taxes on profits from the sale of assets held for a year or less. The tax rate for short-term capital tax gains is similar to your usual tax bracket.
2. Long Term Capital Gains Tax
These are taxes on profits from the sale of assets held for longer than a year. The tax rates for this are 0%, 15%, or 20% depending on your taxable income and filing status. Long-term capital gains tax is usually lower than short-term capital gains tax. This means you can pay lower taxes on stocks.
Taxes on Dividends
Dividends are also considered taxable income. There are two kinds of dividends:
1. Qualified Dividends
Depending on your taxable income, the tax rate on your qualified dividend is also 0%, 15%, or 20% depending on your taxable income and filing status. These rates are lower than non qualified dividends.
2. Non-qualified Dividends
These are also called ordinary dividends. Its tax rate is similar to your regular income tax bracket.
People who are in the higher income tax bracket usually pay more taxes on dividends.
Stock Trader vs Stock Investor
Traders and investors have different tax implications. ATO evaluates the nature of your trading activities and your business when deciding whether to classify you as a stock trader or a stock investor. This information includes the frequency of your trading, your trade decisions and an evaluation of potential investments.
ATO classifies traders as those who
- purchase shares regularly in a routine way (ATO will also look at the size of your investment and the volume of stock traded);
- have a trading plan (ATO checks if you have a registered business, relevant classifications and licenses and business premises);
- make use of trading techniques and market analysis; and
- have a Plan B in case stocks run at a loss.
Tax Deductions for Stock Traders
- ATO includes money from the sale of stocks, and dividends received as part of the assessable income.
- You can claim tax deductions on the cost of buying and selling shares.
- You can also claim deductions on costs of items necessary to making trades and keeping records, such as computers. You can also claim a deduction for depreciation of items that cost more than $300.
Investors are those who usually buy and sell assets irregularly. Investors do not aim to generate income in the short term, but increase wealth in the long run from price appreciation.
The gains and losses on your activities will fall under the capital gains tax regime. This means that any gains from a stock that you purchased less than 12 months ago will be hundred percent assessable, unless you have prior or current capital losses to offset. If, however, you’ve held the stock for over 12 months, you could be eligible for a 50% capital gains tax discount as long as you meet the specific criteria set by ATO.
It is also important to note that capital losses can’t be claimed as a tax deduction. Instead, you can use it to offset capital gains made during the current tax year or you can carry it forward to offset against gains made in the future years.
The tax bracket for investors is more concerned with taxes on long-term share trading and other assets held for a significant period.
Tax Deductions for Share Investors
- You cannot claim deductions from purchase price for shares.
- Capital losses need to be subtracted from capital gains.
- Any net profit is subject to capital gains taxes.
- You can claim deductions on the prepayment of expenses such as subscriptions, seminars or internet fees for up to 12 months in advance.
Implications of Stock Taking
If you are classified as a stock trader, you can claim any gains from the share market as your personal income and any losses as a tax deduction. If classified as a regular investor, your losses are deducted only from your capital gains. Casual investors can’t also claim on any losses and need to pay attention to CGT and the timing of the stock sale. Profits made after the 30th of June won’t be taxed until the following financial year end.
Calculating Taxes on Stocks Sold
Any profits made from trading stocks are added to your total taxable income for the financial year. The taxes you pay will depend on what tax bracket you fit into based on your total income. You can calculate your profits as total profits minus total losses. If you buy and sell stocks within the same financial year, your total profits are included as part of your taxable income. Dividends paid to you are included in your total taxable income.
You could avail of tax benefits for long term investing. If you hold shares for longer than 12 months before you sell it, you are only taxed on 50% of the profits you make from those shares.
Lodging Tax Returns for Shares
As a stock trader or investor, it is important that you include your tax return for stocks as part of your regular tax return after June 30. You’ll also need to report any capital gains you’ve made on buying and selling shares throughout the financial year when you lodge your annual tax return. ATO will also include any dividends you’ve earned. Your broker or your share trading platform will most likely send you a tax statement with the profits you have earned at the end of the year. You need to include this number in your tax lodgment. If you use multiple brokers, it is best to use a portfolio tracker so you can track your total capital gains across all your platforms.
ACT Bookkeeping Group can assist you with your tax lodgments. Contact us today for a free consultation.