Understanding the Difference Between Trading and Investing
When it comes to shares, the distinction between trading and investing is critical. In some cases, profits from selling shares may be taxable. To support a non-taxable position, it is important to maintain clear documentation showing that the shares were purchased with the main intention of being a long-term investment.
Share Trading
Shares are considered part of a trading activity if the main intention at the time of purchase was to sell them for profit.
Profits are usually taxable if you:
- Acquired the shares with the main intention of selling them – even if you end up holding them for a long period of time.
- Operate a share dealing business.
- Frequent purchasing and selling of shares via platforms like Sharsies can be viewed as share trading by the IRD if proper documentation around your intention is not maintained.
- Purchased the shares as part of a profit-making scheme.
- Purchased shares with the main intention of funding something. For example, investing in shares as a way of saving for a house deposit.
On the other hand, losses from trading may also be tax deductible.
Note: Investments taxed under the Foreign Investment Fund (FIF) regime follow different rules.
Share Investing
If shares were purchased with the main intention of holding them long-term, then gains from selling them are generally not taxable. It is essential to retain records at the time of purchase to support this position.
Profits are generally not taxable if:
- They were purchased with the main intention of being an investment.
- The shares were acquired as a long-term investment.
- Selling was a possibility, but not the main intention at the time of purchase
- The main intention at the time of purchase was for investment, even if that intention changed later.
How IRD Assesses Your Intent
The Inland Revenue Department (IRD) considers both your statements and the surrounding circumstances, including:
- The nature of the shares (e.g., dividend-paying versus growth stocks).
- The length of time the shares were held.
- The frequency and context of purchases and sales.
- Supporting documentation, such as emails, research, investment plans, or financial advice.
In Summary
Ultimately, the main intention at the time of purchase determines the tax treatment:
- If the main intention was for long-term investment, gains are typically not taxed.
- If the main intention was selling for profit, gains are likely taxable.
It is important to note that not all shares held must be treated the same way. For example, you may maintain a long-term portfolio that is not taxable upon sale. However, if you also purchase a separate parcel of shares with the main intention of selling them for profit, any gains made on the separate parcel of shares may be taxable.
Need Assistance?
These rules can be complex and have significant tax implications. If you are uncertain about your position, we recommend contacting our team for tailored advice and support in assessing your tax obligations.