Australian Tax: Capital Gains and Losses?

When share trading, you earn capital gains (positive) or losses (negative) when you sells shares that you hold on to for capital growth. Holding shares for more than 12 months may entitle you to a capital gains tax (CGT) discount.

Australian capital gains tax applies to profits made on the sale of a capital asset that was acquired after 20 September 1985. Legislation defines capital gains as "any kind of property" or a "legal/equitable right that is not property."

Share trading is a business, so you pay taxes. A share trader engages in business activities to earn income from buying and selling shares. A share holder, on the other hand, invests in shares to earn income from receipts and dividends, but is not actually carrying out business activities. Simply being a shareholder is subject to certain considerations such as:

• Nature of activity. Are you trading to profit? How often do you trade and what is the volume?
• Do you keep records or books of accounts when trading stock?
• Do you have licences or qualifications? Do you have a registered business name and an Australian business number?
• What is the amount of capital that you use?

In other words, whether you pay taxes or not depends on whether you declare yourself a trader by occupation or not. If you do not declare yourself, you need to keep your capital gains and losses separate from your income and deductions. This means that you can only offset your income with capital gains, not losses. You also cannot include capital losses as a deduction.

Let's take Trader X for example. During a tax year, X earned capital gains of $2000 and capital losses of $6000, leaving a net gain of negative $4000. In his tax return, X declares positive capital gains as $2000 and his net capital gains. In this case, net capital gain is zero. Trader X can indefinitely carry forward his capital losses to future years, as long as X does not use up the losses.