Capital assets of day traders may qualify for tax relief
September, 04th 2006
Day traders holding shares as capital assets will be able to get a capital gains tax relief. This will be similar to the benefit that banks get on profits from sale of shares held as capital assets. The transactions will be treated as investments, and not trade, while computing tax dues on gains from them, said a top government source.
An investor is exempt from paying long-term capital gains tax if he sells shares after a year and makes a profit. He has to pay a short-term capital gains tax of 10%, if he sells the shares before one year.
Gains from all buying and selling of shares of a trader, on the other hand, is treated as his business income. This is because it is the traders business to buy and sell shares. He will be subject to income tax depending on the bracket that he falls in. The maximum rate is 30%.
A day trader is a person who holds stocks for a very short time. He does not hold positions by the close of the day. Gains from day trading will continue be treated as his business income. There is no change in this position.
However, a day trader, like any other person or entity, also has the right to hold shares as capital assets. Assessing officers (AOs) will use tests to check if the transactions have elements of a capital asset transaction.
The Central Board of Direct Taxes (CBDT) is set to sound out AOs so that stocks held as investments, if any, by a day trader are not misconstrued as stocks held in trade. Of course, there will be checks to determine if the shares are indeed held as a capital asset.
The draft instructions issued by the Central Board of Direct Taxes, earlier this year, laid down 15 parameters to differentiate between stocks held in trade and those held as investments. The parameters include the scale of activity, ratio of sales and purchases to the holding and the number of stocks dealt in.
AOs were also told to ascertain if the purchases were made solely with the intention of profit for long term appreciation or for earning dividends and profits. They were advised to take the total effect of the criteria to determine if a person is an investor or a trader in shares.
The CBDT has received suggestions on the draft instructions from various stake holders including day traders who sought a clarification on the tax treatment. The view now is that is that a day trader will qualify for a capital gains tax relief if at all he holds shares as a capital asset.
In the normal course, gains of a day-trader will continue to be treated as business income. This means day traders cannot show their stock gains from trading as investment income to lower their tax liability.