- Published: 20 July 2015
The stock market gains for a trader and an investor are treated quite differently by Income Tax Authorities. If you are an investor, the gains from stock markets fall under the Capital Gains head (concessional taxation), whereas for a trader, it falls under the head of business income (normal taxation).
Though, we at ProsperoTree.com are not tax experts, however, based on the available information, we bring you some answers to this very tricky question –“Are you a Trader or an Investor in the eye of the Tax Authority?”
The tax department does not clearly define the stock market participants – traders and investors. This brings a lot of subjectivity at the end of the tax assessing officer. Following pointers generally help to differentiate the traders and investors who participate in share purchase and sale activity.
1. Frequency of Trades: It is one of the most important factors that distinguishes trader and an investor. Generally traders enter into a purchase and sale transaction frequently or every day. Whereas Investors trade rarely as and when investment opportunities emerge. Trading is a continuous and habitual activity; it is regular purchase and disposal of shares. Investment is infrequent and sporadic share purchase and disposal.
2. Intraday Trading: Most traders participate in intraday (same day) trading to make quick profit from the change in price of shares; whereas investors do not participate in intraday trading.
3. Taxpayers' Activity / Source of Income: Taxpayers' primary activity / source of income also determines the treatment of stock market gains as trading activity or investment activity. Taxpayers' income where it is solely dependent on stock market transaction may be treated as trading income instead of investment income.
4. Treatment of STT in Tax Payers' Books of Account: Traders can claim STT payment as an expense against the gain arising from share purchase and sale activities. However, investors can never claim STT as an expense as Investors' gain is taxed at subsidized rates.
5. Closing Stock Valuation in Tax Payers' Books of Account: The carrying value of investment (closing stock valuation) for an investor is done by only one method – valuing the investments at cost (First In First Out Cost) and shown under the head of ‘Investments’. Whereas trader can value the stock at the end of the year at ‘cost or market price whichever is lower’ and show under the head of ‘Stock in Trade’.
This means that traders can take the benefit of mark-to-market losses (un-booked losses) at the end of year.
6. Intention of Tax Payers: Intention of the trader is to make quick profit in a short time from the change in price of shares and not to earn any dividend. In case of investors, the intention is to derive profit from dividend and capital appreciation of securities over a longer period.
In case of further reference, you can refer to Income Tax Act 1961, Circular No. 4/2007, Dated 15-6-2007.