How do you know if you’re an investor or a trader?

In today’s blog, we will look at how being an Investor differs from being a Trader in Australia when it comes to shares and crypto. We will talk about the main talking points of being an investor versus being a trader and how they are taxed. After this, probably you may now have clarity whether you are an investor or a trader.

ARE YOU AN INVESTOR OR A TRADER?

When it comes to crypto and shares, are you an investor or a trader? The caricature of an investor is the person who holds their coins and shares. This person would generally dollar cost average into the project they fundamentally believe in and maybe YOLO into the occasional meme coin.

On the other side, the caricature of a trader is that wall street guy with four screens up, live charts and who constantly screams “buy, sell & buy”. The trader is characterised by lots of trades, always buying and selling coins for profit in the short term based on technical indicators.

The difference between these two are very easy to spot and it’ll be clear if one of those sounds like you. But what if you think that you are in the middle? How do you know if you are a trader or an investor?

In the eyes of the Australian Tax Office (ATO), it comes down to four main things.

  • The nature and purpose of your activities
  • The repetition, volume and regularity of your trade activities
  • Whether your activities are organised in a business-like way
  • The amount of capital that you invested.

There isn’t any one thing that will make you a trader, each of these will be looked at in the context of your situation. Rather than going through each of these points, you may also check the ATO website as they do a pretty good job of giving more information on each of these.

So now, let’s sum up the trader for you so you have a better idea of what these four points look like together.

How do you know if you are a ‘Trader’?

  • You have a trading plan which is essentially like a business plan for trading. That sets out things like your stop losses, profit targets and how much you allocate into each trade.
  • You consistently trade based on your trading rules
  • You keep records of all your trades to track your trading profit
  • You’ve got a system behind your trades like charting.
  • You are trading with a bit of capital. Although, having a bit of capital is not that applicable to Crypto because the trading fees are a lot less so it’s not like they eat into your trades.

So it’s not like it’s just only for one thing which swings it, but it’s like going to be a combination of all those factors which determine you being a trader.

How do you know if you’re an investor?

First of all, if none of the trading parts sounds like you, chances are you are an investor.

There’s isn’t much more behind your decisions other than some fundamental research, or if someone gives you a hot tip. It’s like ‘you buy, you hold, and you take profit when it eventually is realised. So, if you think you’re not classified as a trader, then you’re an investor.

How does tax differ between a trader and an investor?

The income for an investor and a trader falls into two different categories. Each of these categories has very specific tax treatments. This is the main consequence of being classified as an investor or a trader. These two categories are; Business Income and Capital Gains.

If you are a trader, your income and losses are classified as Business Income and Losses. As an investor, your income and losses are classified as Capital Gains and Losses.

Let’s talk about Business Income first, which is for traders.

When you are a trader, all of your buys and sells of crypto and shares are treated no different as if you are selling mobile phones or clothes. Each time you buy a coin or a share, you’re essentially buying a trading stock. And when you are selling it, you’re essentially selling a trading stock.

If you are a trader of crypto or shares and you make a profit, the profit will be taxed in your hands at your tax rate. There will rarely be any adjustments to this, you’ll pay tax on this profit like you would on any other business income.

If you make a loss, on the other hand, you may be able to claim this loss against most of your other income types like wages, dividends or rental income. Just like a business, claiming your loss will decrease your taxable income for the year and a lower taxable income means you will pay less tax.

Now let’s jump to the other category that applies to investors that is Capital gains. You make a capital gain when you sell an investment value more than you bought it for. And, you make a capital loss when you sell an investment value for less than you bought it for.

Simple right? It’s just like a business income from a trader.

The biggest distinction between a capital gain and a business income is how the gains are calculated and how the losses are used. When it comes to Capital gains, there is an awesome tax concession when you make certain capital gains called the 50% general discount. The concession is just like this, if you buy an investment and hold it for at least 12 months, you will only be taxed on half of the gain. This means the other half is tax-free! Awesome, right?

But of course, there are downsides to categorising the income as a capital gain. First, if you hold an investment for under 12 months and make a capital gain, you’ll still need to have the full capital gain on your hands and unfortunately, no concession will apply.

Next is, if you make a loss. You can’t claim a Capital loss against any other type of income like you can as a trader. If you make a capital loss, you can only apply that capital loss against other capital gains.

Now that we’ve covered Traders and Investors and how profits and losses are treated differently, probably you are now thinking of which one are you? Check this link as we will show you some examples in order for you to understand more about how they differ.

Hope you found the article useful and now have the clarity between an investor and a trader.

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