How are your sharemarket gains taxed?

Getting the most out of the sharemarket partly depends on how your gains are taxed.

This varies depending on whether you are classified as an investor or a trader.

Understanding the difference and then deciding which you are can have important consequences, especially as any attempt to change your status to maximise the tax break you get is unlikely to win tax office approval.

If you are a standard investor - basically someone who gradually builds up a share portfolio and doesn't turn it over frequently - only 50% of any realised capital gain made on shares held for at least 12 months is taxed at your marginal tax rate.

Equally, if these shares generate a loss only half is deductible, and then only against capital gains made in the same financial year. If there aren't any, the loss has to be carried forward.

In contrast, a share trader - someone who can show he or she buys and sells shares as a business - pays tax on 100% of any realised capital gain but gets the benefit of being able to deduct the whole of any realised capital loss from their total income when calculating income tax.

Given the sharemarket's poor performance in recent years, some share investors may be tempted to reclassify themselves as traders to claim 100% of their realised capital losses.

Anyone thinking of trying this would be wise to read the taxpayer alert (TA2009/12) issued by the tax office during the GFC.

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