Tax on share trading in Malaysia

It’s tax time again which means a couple of things if you trade shares in Malaysia. Depending on how often you trade shares and how the Inland Revenue Board Of Malaysia (IRBM) classifies you, you might need to pay tax on the profits or gains you’ve made or you could be eligible for a tax exemption.

Whether you’re a trader or investor, this guide explains how much tax you need to pay and whether you’re eligible for benefits.

Do I need to pay tax on shares?

While income is taxable in Malaysia, capital gains on shares are not subject to tax. Under the Malaysian Income Tax Act 1967, the government does not impose a tax on any profits or gains deriving from any price increase when you sell a stock. Capital gains tax is only applicable to gains from the sale of real properties or shares in a real property company.

However the IRBM may treat your capital gains on shares as income and taxable depending on several factors. These include your intention at the time of the purchase, the frequency of your transactions, the holding period and source of funding.

For example, if you buy the share to sell it in a short period of time (within days or a few months) and you regularly buy and sell shares, the profit or gain could be treated as income and taxed at the applicable income tax rates. The use of borrowings to finance the shares can be speculative and therefore also bringing the gains to income tax.

As for dividends, Malaysia implements the single-tier tax system for public companies, where dividends payable to shareholders are exempt from income tax. Under this system, a company’s income is taxed at a corporate level as the final tax and there is no withholding tax on dividends paid and distributed to shareholders.

How does taxation work on robo-advice and micro-investment apps?

If you use a robo-advice or micro-investment platform such as StashAway or Raiz, you typically invest in exchange traded funds (ETFs) which consist of stocks, bonds and other types of securities. Since these platforms tend to focus on foreign ETFs such as those listed in the US, your dividends may be subject to withholding tax depending on the jurisdiction of the securities.

For example, dividends on US ETFs paid to foreign investors are subject to 30% withholding tax though your platform may be able to find a way to partially reimburse these taxes for you. The good news is that the dividend distributions you received from foreign ETFs are exempt from Malaysian tax as they are considered foreign sources of income.

How does the IRBM classify share traders and share investors?

There are different tax implications depending on how often you trade shares, whether trading is your primary source of income and how the IRBM classifies you. There is no specific guidance on when to treat the profits or gains on share transactions as income or capital gains. Though there are some basic guidelines, ultimately the IRBM makes decisions on a case-by-case basis.

In general, individual retail investors are not taxed on their gains by the IRBM, but there are some exceptions. Tax audits, tax investigations, or requests to produce capital or net worth statements are some of the underlying basis why gains from share transactions are usually raised as taxable.

The IRBM assesses the nature of your trading activities and your business or trading plan when deciding. This information includes how often you trade, why you make certain trade decisions and an assessment of potential investments.

If you are a share trader who is subject to income tax, you need to disclose your net gains in the income tax return form (ITRF). You can claim deductions on expenses related to the transactions as well as other expenses based on the general deduction rules.

Your total income will then be calculated and taxes should be paid at the applicable income tax rates for the financial year (see below).

Individual income tax rates for 2021

How does the tax office define a trader?

Tax implications are different for traders and investors. The IRBM will classify you as a trader if you can answer yes to the following:

1. You purchase shares on a regular basis in a routine way.
2. You have a trading plan.
3. You make use of share trading techniques, such as market analyses.
4. You have a Plan B in case your shares run at a loss.

What is a share trading plan?

You have a share trading plan if you can answer yes to the following:

1. You carry out analyses of future investments.
2. You look at the market to identify areas of potential gain.
3. You make a decision to buy or hold shares based on future value.

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