Accurate tax reporting for Australian traders is crucial as the Australian Tax Office (ATO) is vigilant and will impose penalties and fines for tax avoidance or evasion.
However, the tax rules for Australian traders are not one-size-fits-all. Instead, the rules vary depending on your trading circumstances, such as the markets you trade, whether trading is a business or a hobby, and even how long you hold a trade.
The rules are difficult to understand—the trading tax laws are thousands of pages long, and there are a number of sources presenting contradictory information.
So, before getting into trouble with tax authorities, let’s look at what we must know about Forex taxation in Australia.
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How Forex Trading Profits Are Taxed
Trader or speculator? There’s a tax difference
The Australian Tax Office treats taxation of trading based on whether they consider individuals to be, in their language, “traders” or “speculators.”
- Traders: This category is when individuals meet certain criteria that classify their trading as a business activity. The bar is quite high to qualify as a trader rather than a speculator, but being in this category is generally more tax advantageous.
- Speculators are those where the ATO considers their trading to be a hobby.
I recommend that every Australian forex market trader begin by seeing whether they fall into the “Trader” or “Speculator” category.
Trader Category for ATO Tax Rules
To meet the criteria, individuals treat their trading as a business. To make this determination, the ATO looks at the following:
- Trading frequency. How many trades per week or month do you execute? What is the volume of trades? Is it similar to that of other ‘ordinary’ day traders? The more frequently you trade, the more likely the ATO will consider your trading as a business activity. If you are executing a new trade once a week or less, or you make a windfall profit on a single trade, it’s unlikely that the ATO will allow you to classify your trading as a business. According to an ATO representative's post on the ATO online forum, “You would usually need to be making a huge number of trades to be considered to be in business as a trader.”
- Registered business. Do you have a registered business name and Australian business number?
- Skill. What level of skill or methodology are you applying as a trader? Are you consistently applying a trading strategy with money management rules? Do you regularly do courses to improve your skills as a professional trader?
- Equipment and resources:
- Are you using dedicated resources?
- This could include monitors, a high-powered trading computer, faster internet, and subscriptions to charting platforms and data feeds.
- Have you set up a special office at home or elsewhere designated exclusively or mainly for trading?
- Are you using dedicated resources?
- Capital. How much capital are you committing to your trading activity? The more capital you have set aside, the greater the chances you meet the ‘business’ qualification.
This is not an exhaustive list of criteria, but they are some of the most essential items the ATO considers.
If the ATO recognizes your trading activity as a business:
- Profits are business revenue. This means profit is taxed as business revenue, not personal income.
- Deductible expenses for Forex traders -some expenses are tax deductible or depreciable. These can include:
- Subscriptions to trading services, such as courses or trading rooms
- Automated trading software
- Trading tools and data feeds
- Courses
- Home office expenses, especially dedicated resources towards trading such as computers, monitors and office furniture.
- Offsetting losses. If you make losses from trading, you can deduct your losses against your other income (like your day job salary and wages or your business income) subject to the non-commercial loss rules.
Speculator Category for ATO Tax Rules
Generally, the ATO will consider you a speculator if:
- You trade now and again with no regularity.
- The frequency of trading is intermittent and low.
- There’s no system or method behind your trading.
- You’re not using special equipment or software to conduct your trading (besides perhaps an ASIC regulated brokerage platform).
- You’re not keeping records of your trading activity.
In other words, you’re trading is much more a hobby than a profession.
How does the Australian Tax Office (ATO) tax speculators?
If you fall into this category, the Capital Gains Tax (CGT) regime applies:
- Capital Gains Tax on your profit. Your trading profits are taxed as capital gains at your full marginal tax rate, not as ordinary income.
- According to the ATO, if you have made a loss on Forex or CFD trading (and are not in business), you can deduct the loss from your other income by recording the loss amount at label D15 in the supplementary section of your income tax return.
- If you're trading CFDs, they will always be “on revenue account.” This means you include any profits in your assessable income, and any loss can be included as a deduction. Your profit or loss is made when your trade is closed out rather than when the proceeds are transferred from your trading account. You're then taxed on all your income at the marginal rate that applies to your income level.
Trader vs. Speculator: Private Ruling from the ATO
If you feel you may qualify for the “trader” category from the ATO, i.e., they consider you to be in business as a trader, but you are unsure, you can request a private ruling from the ATO to confirm the determination. This is an excellent option as it may prevent an erroneous tax filing or subsequent audit and penalties if you have filed your taxes incorrectly.
How to Avoid Tax on Forex Trading in Australia
This is a common question, and the truth is that there is little you can do to avoid paying taxes completely for Forex trading in Australia. The best way to reduce taxes is to see if your trading qualifies as a business, which helps deduct expenses and losses against other income.
Tax Planning Strategies for Forex Traders
CGT Discount
Traders that hold a trade for more than 12 months before closing it can receive a 50% CGT discount on their capital gains tax. Losses are not tax-deductible but can be used to offset capital gains made in the current or future financial years. Importantly, Forex qualifies for this CGT rule, but CFDs do not.
Using a Tax Specialist
If I were an Australian resident with a decent amount of trading, especially if I felt I could qualify my trading as a business rather than a speculative hobby, I would use a tax agent to help me with my tax planning strategy. Find a registered agent in your area by searching the Tax Practitioner's Board.
Is Forex Trading Subject to GST in Australia?
Goods and services tax (GST) is a 10% value-added tax on most goods, services, and other items sold or consumed in Australia. Forex and CFD trading are not subject to GST in Australia.
Bottom Line
The first thing to consider as an Australian trader is whether your trading qualifies as a business or a speculative hobby. There are stringent conditions to qualify it as a business, and the ATO can give you a private ruling if unsure. It is much more tax advantageous if your trading qualifies as a business rather than a speculative hobby; for example, more tax deductions are available, and profits are taxed as a business rather than personal income. I recommend using the services of a tax specialist if your trading is at a level that might qualify as a business.
