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It’s tax time again which means a couple of things if you have investments – you might need to pay capital gains tax and you may be able to claim deductions.
Depending on how often you trade shares and how the South African Revenue Service (SARS) classifies you, you may either have to pay capital gains tax or pay tax on share trading as part of your personal income as revenue gains.
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?
Yes, you need to pay tax on any profits that you’ve made from share trading during the year – this is called capital gains tax (CGT). Any profits that you make are added together and you will be taxed on your total capital gains for the year. In South Africa, this is taxed separately from your personal income tax.
Dividends are also excluded from your personal income. Instead, they they are taxed separately as part of dividends tax. But all you have to do is declare this as non-taxable income on your tax return as the company paying the dividends will already have subtracted 20% and paid the tax for you.
Profits aren’t taxable until you actually sell your shares. If you sell before March 1, your profits will be included as your taxable income this financial year and if you sell after March 1, it’s added to the following year’s tax return.
Note: If you’re classified as a ‘share trader’ for business purposes, the tax implications are a little different because you can claim any losses accrued from trading shares as a tax deduction (see below).
How to calculate tax on shares sold
Any profits you make from share trading is calculated as capital gains tax unless you’re classified as a share trader, in which case it will be taxed directly as part of your personal income. The tax you pay on your shares will depend on what tax bracket you fit into based on this total income.
Capital gains tax
In terms of capital gains, you would add up the amount you made when selling the shares and subtract the amount you paid for those shares. What’s left is capital gains you made on those shares. This amount will then be added to all of the other capital gains you acquired over the course of that year (property sales, rent income, etc.) and be taxed in total.
Capital gains tax has a R40 000 annual exclusion, everything you make above that is considered taxable. After calculating your capital gains, 40% of that is taken and then added to your total personal income for that year. You will then be taxed based on the relevant tax bracket that applies to you.
Tax on share trading as revenue
If you’re a casual investor that regularly buys and sells shares, then it’s considered trading stock and you will be taxed annually based on the income you make from profits gained. Traders are also allowed to write off their losses, which means that you can deduct the loss of a trade from your normal taxable income.
Your profits are calculated as total profits minus total losses. So, if you bought 10 Tsogo Sun Hotels (TGO) shares at R200 per share and sold them all at R400, your taxable profit is R2000. But say a month later you bought 10 TGO at R400 and sold them at R300, your total taxable profit (if you made no other trades) would be R0.
The tax incurred for capital gains is lower than paying tax directly based on the profits you made by selling shares. So many people opt to hold onto their shares for a little longer to “qualify” for capital gains tax instead.
How do I lodge a tax return for shares?
Your tax return for shares is included as part of your regular tax return.
When you lodge your annual tax return, you’ll need to report any capital gains you’ve made on buying and selling shares throughout the financial year. Any dividends you earn will have already been taxed for you, so you can list that as non-taxable income.
At the end of the financial year, your broker or online share trading platform will send you a tax statement with the total profits you’ve earned. If you’re lodging your own tax return, you’ll need to include this number in your report. If you use a tax accountant, send the tax statements to them to work out.
If you use multiple brokers, it’s a good idea to use a portfolio tracker to track total capital gains across all platforms.
How do I pay tax on robo-advice and micro-investment apps?
If you use a robo-advice or micro-investment platform such as SatrixNOW or EasyEquities, you are taxed on any profits you make from your portfolio.
Like regular share trading, your profits (minus losses) are added to your total taxable income. Your platform will typically send a tax statement each year. If you’ve been given dividend payments, these are automatically taxed before being paid out to you so you won’t be taxed again.
How to pay tax on US shares
You need to pay capital gains tax (profits minus losses) on US shares in the same way you do South African shares, however currency conversions add another element to the equation.
When buying and selling US stocks, the capital gains is calculated immediately at the moment the trade occurs, not when you convert your currency back into ZAR from USD.
The CGT calculation is made by converting USD to a ZAR amount at the time of the transaction.
So say you purchased US$1,000 of Tesla shares, then sold those shares for US$1,000 a few months later – your capital gains in USD may appear to be $0, but in ZAR amounts you may have either profited or lost income.
How does SARS classify share traders and share investors?
There are different tax implications depending on how often you trade shares and whether you can be classified a ‘share trader’ for business purposes or a long-term investor.
SARS defines a business for tax purposes as any money making venture where you’re not an employee. Share trading fits this definition; however, there are no black and white rules about who is a share trader and who isn’t. SARS gives some guidelines but ultimately makes decisions on a case-by-case basis.
SARS 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. As far as SARS is concerned, you fall into the category that aligns with your intentions. Although, if questioned, you have to be able to prove that your actions did reflect your intentions.
If you bought shares with the intention to hold them only long enough to make a profit from them, they are considered trading stock and the revenue will be added to your income for the year. If you bought shares with the intention to hold onto them as assets for a longer period, then the gains you make from selling these shares are considered capital gains.
You have to decide how to declare this income when you file your taxes. Keep in mind that this can be disputed by SARS if they deem you aren’t being truthful. In past court cases, judges have ruled in SARS’ favour because the evidence showed that people traded their shares in the short term, even when they claim to have bought the shares with the intention to hold them long-term.
What are the tax implications of share trading?
If you satisfy SARS’ definition of being a share trader, you can claim any gains from the share market as your personal income and any losses as a tax deduction. If you’re a regular investor, your losses are deducted from your capital gains only.
Casual investors can’t claim on any losses and need to pay attention to Capital Gains Tax (CGT) and the timing of the sale of shares. Any profits made after March 1 won’t be taxed until the following year.
How does the tax office define a trader?
Tax implications are different for traders and investors. While there’s a lot of gray area here and there aren’t any hard definitions, SARS will likely classify you as a trader if you can answer yes to the following:
- You purchase and sell shares on a regular basis in a routine way. SARS will also look at the volume of shares traded and the size of the investment(s).
- You have a trading plan. SARS will look at whether you have a registered business and whether you have business premises and all the relevant qualifications and licences.
- You make use of share trading techniques, such as market analyses.
- 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:
- You carry out analyses of future investments.
- You look at the market to identify areas of potential gain.
- You make a decision to buy or hold shares based on future value.
- Money from the sale of shares are included in assessable income.
- The costs of buying and selling shares can be claimed as a tax deduction.
- Share traders can claim the costs of items such as computers, as they are necessary to making trades and keeping records.
- Can’t claim the purchase price of shares as a tax deduction.
- Capital losses aren’t subtracted from capital gains.
- Any net profit is subject to CGT.
- Can’t claim deductions on the prepayment of expenses.
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