Keep your side of the tax deal clean
It is tax season and as much as we moan about paying tax in the trading and investing space, tax is a result of success. In short, no profits mean no tax, so only those making profits are liable for tax. The question is what and how.
First a disclaimer: I am not a tax expert nor is this tax advice. This is merely based on my personal experience. One should get solid personal advice from an accountant or even SARS, which really is the friendliest and most helpful Government department that we have.
The easiest tax is Dividend Withholding Tax (DWT), which came into effect two years ago. Here you pay 15% of the declared dividend as tax. Being a withholding tax, you don’t see the money, the 15% gets paid directly to SARS on your behalf. So if a company declares a 100c dividend, you would receive only 85c.
Next is tax for investors. The distinc- tion between investing and trading used to be a little murky but has since been cleared up. Earlier this year SARS issued an updated document on how it will treat profits made from shares, with a simple rule: hold for longer than three years and you pay Capital Gains Tax (CGT), but if you sell within three years SARS may declare you a trader and then profits are taxed as income.
CGT is 33.3% of one’s marginal tax rate and if you fall into the top 40% tax bracket, that means 13.3%. But the first R30 000 of capital gain every year is tax free and, importantly, you only pay the tax when you sell. So while you may have a stock that has tripled in the last few years, your tax liability is only due when you sell. Further, CGT came into effect in 2001 and if you have a share you bought before then, you pay the price it traded at on 1 October 2001 (your broker will have this value). This is in part why I hate selling. Every sale I do from my long-term portfolio immediately loses 13.3%, so I prefer to buy quality stocks and try to hold them forever.
The other side of the tax coin is tax on traders, which is loosely def ined as transacting for income rather than growth. Here you pay tax at your marginal rate, so potentially 40% if you are in the top tax bracket. However, as it is deemed income, you are able to offset all the costs incurred in achieving that income. This would include brokerage costs, losing trades and other costs such as books, software and maybe even subscriptions to trading advice services and publications such as this one and potentially even pro-rata on your Internet access costs and the like. The key point here is to keep excellent records of your costs.
I always suggest to keep separate accounts for your trading and investing as this will keep things clean for tax purposes and your broker should be able to offer this at no extra cost to you. Then, when filling in your tax return, you have nice clean distinction between trading and investing. Also, sometimes you buy a stock for the long term, but you sell sooner than expected due to something changing for the worse. If it is in your investment account it is easier to defend as an investment.