How to account for Forex Trading gains/losses in individual tax return? Should it be reported under capital gain under investment income or business income? If under investment income, how? if under business income, how? Thanks

Discussions in stock trading forums typify the confusion that surrounds CFDs and tax, and many articles with scant information simply recommend getting professional tax advice. Of course you should. But although the tax situation is complex, the taxation rules for the vast majority of leveraged traders can be stated in a few paragraphs. Melbourne-based accounting firm, Trentons, is a specialist in CFD taxation, and has trader clients all over Australia. Second, under the taxation rules, leveraged traders are not share traders.

Professional share traders who meet the share trading criteria can treat shares purchased as trading stock, treat the proceeds of share sales as income, offset the cost of the shares acquired, and are allowed tax deductions for costs incurred in selling that stock.

But professional share traders deal in actual shares. Those who use CFDs for hedging that is, to manage the price risk of other assets are in a separate category for which there is no space here; but briefly if the asset being hedged is on revenue account, so are the profits and losses on the hedging instrument. Similarly, CFD gains and losses may be able to be treated as on capital account if the asset is a capital item.

Trading profits are assessable as ordinary income, after deducting trading losses and expenses incurred in trading.

The tax office will also look at turnover, the amount of capital involved, and whether there is a home office specifically set aside for conducting trading activities. Many CFD traders can spend thousands on websites and subscriptions.

If your trading shows a net loss in any year, it is deductible against any other income. Any sophisticated leveraged trader, using CFDs with a trading strategy and money management system, would fall into this category. But care must be taken with the non-commercial loss rules, which work to prevent the claiming of losses from non-commercial ventures — such as hobby farmers from claiming deductions for business expenses for activities where there is little or no hope of achieving a profit.

Read it here This document gives a checklist to help you determine whether your venture is commercial or non-commercial. In deciding whether a business is commercial or not, Noble says, the ATO takes into account such factors as the amount of assessable income, the level of trading profits, whether the taxpayer has real property and whether they have other assets. More detailed information from the tax office is available here: The official ATO ruling on non-commercial losses is available here.

It is brought forward and offset against future profits. Finally, there is the question of deductions. Allowable deductions would include brokerage, finance journals, advice from advisers, and essential software such as a charting package.

But there is some discussion, where you enter into a course to understand the basics of CFDs, about whether that has a capital element. The start-up expenses are the grey area, as to when you start to carry on the business. The above article is of a general nature only and is not investment advice.

TheBull recommends that you seek individual advice from a tax specialist.

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