Tax treatment of CFD losses

dojara · 26 September 2008

So I need to fill in my ETax this last FY and yeah I made a loss of some 20K from CFD daytrading. I consider this to be a 'profit-making undertaking' under s15-15 of ITAA 1997 so this can be claimed as a deduction against assessable income. I dont see it as recreational gambling as I was trading fulltime and conducting frequent trades of considerable size. So I was wondering what others who have made CFD losses done in their tax return? Do you fill in fill in section 'D15 - Other deductions' under Expenses given my reasons above are all valid? Or do you only treat these as a CGT event and use it to offset future capital gains?

iimamit · 19 July 2009

Re: Tax treatment on CFD losses

dojara said:
So I need to fill in my ETax this last FY and yeah I made a loss of some 20K from CFD daytrading. I consider this to be a 'profit-making undertaking' under s15-15 of ITAA 1997 so this can be claimed as a deduction against assessable income. I dont see it as recreational gambling as I was trading fulltime and conducting frequent trades of considerable size. So I was wondering what others who have made CFD losses done in their tax return? Do you fill in fill in section 'D15 - Other deductions' under Expenses given my reasons above are all valid? Or do you only treat these as a CGT event and use it to offset future capital gains?

Mate, thanks for this post.. I was filling in my tax returns and was just wondering which section in e-tax do you put this deduction ?? Thanks in advance

rock86 · 19 July 2009

Re: Tax treatment on CFD losses

Mate, I actually thought that you could only use your losses to offset future share capital gains, unless you can show that your primary income or you if you can classify yourself as a trader. Was this your primary source of income?? If so, go for your life.

Krusty the Klown · 19 July 2009

Re: Tax treatment on CFD losses

Unless you declare your trading profits as "ordinary" income, then all profits and losses from CFD trading should be treated as "capital" gains and losses.

So your losses can be used in future years to offset any capital gains.

For you to treat your profits as "ordinary" income you must be able to demonstrate that you are "effectively" carrying on a business - ie have a business plan, have very regular trading activity, a place to carry out the business activity, keep meticulous records of activity etc. The same way any other business does.

Most people would treat these activities using the capital gains system.

awg · 19 July 2009

Re: Tax treatment on CFD losses

http://www.thebull.com.au/articles_detail.php?id=121

this article gives some pointers, no absolute clarity though.

There is only one way to be sure, and that is to apply for an ATO "private ruling"

You could also scope out an accountant that has experience with clients who trade CFDs

rock86 · 19 July 2009

Re: Tax treatment on CFD losses

Krusty the Klown said:
Unless you declare your trading profits as "ordinary" income, then all profits and losses from CFD trading should be treated as "capital" gains and losses.

So your losses can be used in future years to offset any capital gains.

For you to treat your profits as "ordinary" income you must be able to demonstrate that you are "effectively" carrying on a business - ie have a business plan, have very regular trading activity, a place to carry out the business activity, keep meticulous records of activity etc. The same way any other business does.

Most people would treat these activities using the capital gains system.

Yeh totally correct, however I think that whenever you make a capital loss, the capital loss can only offset future capital gains in the same CGT area ie. capital losses in shares cannot be used to offset a capital gain on the sale of an investment property.

Krusty the Klown · 20 July 2009

Re: Tax treatment on CFD losses

rock86 said:
Yeh totally correct, however I think that whenever you make a capital loss, the capital loss can only offset future capital gains in the same CGT area ie. capital losses in shares cannot be used to offset a capital gain on the sale of an investment property.

rock, the nature of the capital item is irrelevant for CGT purposes. Any loss on disposal of a capital item can be offset against any other item.

For example lets say you speculated and bought and sold an antique and made a loss, you might not ever buy another antique so could not offset the loss.

Or a business buys, uses and sells a piece of machinery, say for packing fruit, at a loss - they may not ever buy one again. But they could offset it against the gain on disposal of a piece of land.

The ATO is only interested in net gains and losses.

The formula is - calculate your net capital gain or loss for this income year that you are completing your return for and then apply it to your accumulated losses from previous income years.

rock86 · 20 July 2009

Re: Tax treatment on CFD losses

Krusty the Klown said:
rock, the nature of the capital item is irrelevant for CGT purposes. Any loss on disposal of a capital item can be offset against any other item.

For example lets say you speculated and bought and sold an antique and made a loss, you might not ever buy another antique so could not offset the loss.

Or a business buys, uses and sells a piece of machinery, say for packing fruit, at a loss - they may not ever buy one again. But they could offset it against the gain on disposal of a piece of land.

The ATO is only interested in net gains and losses.

The formula is - calculate your net capital gain or loss for this income year that you are completing your return for and then apply it to your accumulated losses from previous income years.

Yeh mate you are definately correct, asked around the office today and everyone said exactly the same as you. Will be asking more then one person around the office next time, I should probably actually go tell him now, lucky we're both only grads.

rock86 · 20 July 2009

Re: Tax treatment on CFD losses

Krusty the Klown said:
rock, the nature of the capital item is irrelevant for CGT purposes. Any loss on disposal of a capital item can be offset against any other item.

For example lets say you speculated and bought and sold an antique and made a loss, you might not ever buy another antique so could not offset the loss.

Or a business buys, uses and sells a piece of machinery, say for packing fruit, at a loss - they may not ever buy one again. But they could offset it against the gain on disposal of a piece of land.

The ATO is only interested in net gains and losses.

The formula is - calculate your net capital gain or loss for this income year that you are completing your return for and then apply it to your accumulated losses from previous income years.

rock86 said:
Yeh mate you are definately correct, asked around the office today and everyone said exactly the same as you. Will be asking more then one person around the office next time, I should probably actually go tell him now, lucky we're both only grads.

Just to add onto this, the only capital loss that cannot be used to offset any other capital gains is a capital loss from collectables (jewellery, antiques, paintings etc.), a capital loss from collectables can only offset a future capital gain from another collectable asset/s

http://www.ato.gov.au/individuals/content.asp?doc=/content/36555.htm&page=1#P10_750

Krusty the Klown · 20 July 2009

Re: Tax treatment on CFD losses

Actually I used an antique as an example in my previous post to offset a loss against anything!!

Guess who's going to have to brush up on their theory!!!!!

rock86 · 20 July 2009

Re: Tax treatment on CFD losses

Krusty the Klown said:
Actually I used an antique as an example in my previous post to offset a loss against anything!!

Guess who's going to have to brush up on their theory!!!!!

Haha, only reason I remembered is cause I had a look at the ATO website:

jonojpsg · 20 July 2009

Re: Tax treatment on CFD losses

Well I was told by the ATO that CFDs could be treated as business income/loss and simply filled out the business section with my overall loss as the income. All you need to be able to do is show that you had more than $20k of income (profits) for the year that you could claim the losses against.

jono1887 · 20 July 2009

Re: Tax treatment on CFD losses

Krusty the Klown said:
Unless you declare your trading profits as "ordinary" income, then all profits and losses from CFD trading should be treated as "capital" gains and losses.

So your losses can be used in future years to offset any capital gains.

For you to treat your profits as "ordinary" income you must be able to demonstrate that you are "effectively" carrying on a business - ie have a business plan, have very regular trading activity, a place to carry out the business activity, keep meticulous records of activity etc. The same way any other business does.

Most people would treat these activities using the capital gains system.

Do you need to be a registered business with an ABN and all that to declare share trading as ordinary income?

rock86 · 20 July 2009

Re: Tax treatment on CFD losses

jonojpsg said:
Well I was told by the ATO that CFDs could be treated as business income/loss and simply filled out the business section with my overall loss as the income. All you need to be able to do is show that you had more than $20k of income (profits) for the year that you could claim the losses against.

If you are a day trader, and that is your primary income, then yes the gain/loss on shares would be treated as ordinary income.

jono1887 said:
Do you need to be a registered business with an ABN and all that to declare share trading as ordinary income?

Most day traders would have an ABN and declare it that there business is trading shares. This would allow you to claim the GST incurred in trading and also to claim things such as brokerage as a deduction where other shareholders cannot (forms part of CGT costbase). However I don't know if it would be necessary to have an ABN, I'm guessing you probably would though.

A little help From Whiskers post in another thread

Quote:
Carrying on a business of share trading

A ‘business’ for tax purposes includes ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. This definition would include a business of share trading.

The question of whether a person is a share trader or a share holder is determined in each individual case. This is done by considering the following factors that have been used in court cases:

1.the nature of the activities, particularly whether they have the purpose of profit making
2.the repetition, volume and regularity of the activities, and the similarity to other businesses in your industry
3.the keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number
4.the volume of the operations, and
5.the amount of capital employed.

1. Nature of activity and purpose of profit making

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on.

A share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares.

Shares may be held for either investment or trading purposes, and profits on sale are earned in either case. A person who invests in shares as a share holder (rather than a share trader) does so with the intention of earning income from dividends and receipts, but is not carrying on business activities.

It is necessary for you to consider not only your intention to make a profit, but also the facts of your situation. This would include details of how the activity has actually been carried out or a business plan of how the activities will be conducted.

http://www.ato.gov.au/businesses/con...tent/21749.htm

Krusty the Klown · 21 July 2009

Re: Tax treatment on CFD losses

jonojpsg said:
Well I was told by the ATO that CFDs could be treated as business income/loss and simply filled out the business section with my overall loss as the income. All you need to be able to do is show that you had more than $20k of income (profits) for the year that you could claim the losses against.

I would be a bit more careful with this. You can do it this way if your situation warrants it, but it is always up to your individual situation. I would run your individual situation by a tax adviser before you do this as it may come back to haunt you.

Beware, just because someone works for the ATO does not qualify them to give individual tax advice, they are giving you general advice - the same as you can see on the ATO website.

jono1887 said:
Do you need to be a registered business with an ABN and all that to declare share trading as ordinary income?

You don't need an ABN to declare trading income as ordinary income, if you want to register for GST and claim GST input tax credits you will have to though. As the end user of most goods and services, you will bear the GST cost however, ie you have no customers to pass the GST on to.

Your business TFN is your ABN + 2 more digits.

jonojpsg · 21 July 2009

Re: Tax treatment on CFD losses

Indeed, each situation is unique. However the process of trading CFDs whereby one is making on average a couple of trades a day with the aim of making a profit I would have thought qualifies as a business undertaking?

As far as records go, at least with IGMarkets, they provide a profit/loss statement that you can download for the financial year which contains all the information you need to prepare an overall figure for the years profit or loss.

E-Tax was pretty clear though that if it is a sideline business to your main source of income that it needs to pass one of four tests to qualify as assessable income(loss), one of which was at least $20k of profits (gross) for the financial year.

Just my situation though, and as Krusty says, check your own situation for yourself.

rock86 · 21 July 2009

Re: Tax treatment on CFD losses

jonojpsg said:
Indeed, each situation is unique. However the process of trading CFDs whereby one is making on average a couple of trades a day with the aim of making a profit I would have thought qualifies as a business undertaking?

As far as records go, at least with IGMarkets, they provide a profit/loss statement that you can download for the financial year which contains all the information you need to prepare an overall figure for the years profit or loss.

E-Tax was pretty clear though that if it is a sideline business to your main source of income that it needs to pass one of four tests to qualify as assessable income(loss), one of which was at least $20k of profits (gross) for the financial year.

Just my situation though, and as Krusty says, check your own situation for yourself.

$20K turnover, not profit. Comes under non-commercial loss rule. And the other 3 tests would be hard to qualify through day trading.

jono1887 · 22 July 2009

Re: Tax treatment on CFD losses

rock86 said:
Mate, I actually thought that you could only use your losses to offset future share capital gains, unless you can show that your primary income or you if you can classify yourself as a trader. Was this your primary source of income?? If so, go for your life.

Well I earnt 17k from trades and 1k from interest and $800 from real work : I suppose trading is my primary source of income for the last year. So can I classify myself as a trader?

Sunder · 22 July 2009

Re: Tax treatment on CFD losses

Let's take a step back here guys - People holding CFDs don't hold any assets. I.E No capital.

I thought this was the reason all differences are settled daily, not at the close of contract, so that it can be treated as income and expenditure, not as capital gains and losses.

Krusty the Klown · 22 July 2009

Re: Tax treatment on CFD losses

Sunder said:
Let's take a step back here guys - People holding CFDs don't hold any assets. I.E No capital.

I thought this was the reason all differences are settled daily, not at the close of contract, so that it can be treated as income and expenditure, not as capital gains and losses.

CFD's are marked to market daily, but they are not settled in cash until the contract is closed out.

The ATO has advised that CFD's have the same treatment as any other financial derivative, even though there is no ownership of the underlying physical asset, and therefore can be captured by the CGT provisions.

Tax treatment of CFD losses

dojara

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