A lot of countries around the world feed on tax collection. The monies generated from this channel are used for socio-economic securities particularly in the western countries, where the agricultural sectors, mining sectors and some other sources of revenue are can not cater to some national needs. Tax is the best route to ply for these countries because of the need for infrastructural development, maintenance of the country’s tourism centers and what have we.
There are several types of taxes such as:
- Inheritance/Estate taxes,
- Consumption tax,
- Value-Added Taxes,
- Income taxes,
- Property tax,
- Capital gains taxes et al.
But for the sake of this paper, emphasis will be placed on those affecting business and trading activities as well as financial institutions. Most importantly, the tax on trading is not focused on the types of shares you sell or buy, all that the system is after is the statistics for your profit and loss.
Besides the difference in the agencies responsible for the collection, there are differences in the taxation systems adopted in several parts of the world, just like the disparity between colors and human faces. What is obtained in a part is not usually similar to what should be expected from the other side. This speaks volumes of the distinction and peculiarities of a country’s taxation system in comparison to another.
Tax on trading in the India is not similar to that in Australia, UK and the U.S. It should also be noted that these tax systems have different laws and loopholes to go about them but that isn’t the subject of this article.
That doesn’t imply that some countries are not tax-free, there are few exceptions to the rule. For instance the unlike in the U.S, the government of Bahamas imposes no income tax on its residents because it receives revenue from tourism, which makes residents pay zero tax, regardless of how much they earn and where they work.
Also, in Oman, residents with residential permits are not taxed personal revenues. The permits are limited and the two most common ways of getting it are through employment or an Omani family member.
Meanwhile, the truth and also a point of convergence is that hypothetically, no American gladly rushes to the Internal Revenue Service’s (IRS) office in the U.S neither is any Briton happy to pay taxes to Her Majesty’s Revenue and Customs (HMRC) in the UK. In essence, stories about tax evasion make the headlines of newspapers more often as most people would have loved not to pay if given the chance but the state laws would not permit because fines and court charges await defaulters.
Capital gains and Capital Losses taxes
Of all taxes on everyday trading, taxes paid on Capital gains and Capital Losses are the most important because in the global Forex market, sellers and buyers without the knowledge of tax computing, groan particularly when losses are recorded.
In trading, the gains explain the profit made from buying or selling a security while losses arise when one loses out from buying or selling a security. However, in both cases, taxes are paid. Tax will be remitted on capital gains if one holds the position for less than a year, which is as well considered as a short-term capital gain and shares the same rate with taxes on normal income.
Moreover, in a case of loss, one can always deduct those losses up to the amount of capital gains gained in that financial year. As one of the advantages of some tax systems, one can wave an additional amount if more losses are recorded than the gains in one year. A tax example can be found in the U.S. A tax rule allows you to write off an extra $3,000 a year, and anything above that you can carry forward to the next tax year.
Although difficult, to enhance transparency, the buyer or seller is saddled with the responsibility of computing the gains and losses to file the dues or deductions with the appropriate tax authorities.
Categories of taxpayers in different countries
As earlier stated, day trading is not the same everywhere as there is a diverse categorization of taxpayers, which will be proved in this section.
In India, a South Asian country, where taxes are relatively straightforward, activities of intraday traders, who do not hold positions overnight, are grouped under speculative transactions and are subjected to pay speculative business income tax. However, in another group, the tax is charged after all profits have been netted to your other incomes. This means that the trading activities are taxed at the usual total income slab.
Similar to the Indian system, Canada’s taxes for day trading are also straightforward as one can decide to announce the profits as capital gains or as business income to the Canada Revenue Agency (CRA). The capital gains and business income are the basis for payment.
In furtherance, in the United Kingdom, Tax on trading profits falls into three main categories. Such as; Self-employed trading activity, in which a trader is taxed at the same rate with a random Self-employed individual; Speculative, in which the person is free from business tax and capital gains tax owing to betting or another risky trading like binary options, and lastly; a private investor, whose gains and losses will be subject to the capital gains tax.
Also, unlike in other systems, the Australian system is distinct and significant for day traders as they are exempted from any form of capital gains tax. According to the Australian Tax Office, a trader if you carry out business activities to earn a personal income as an investor or you trade often and according to a plan and strategy then you meet these criteria. The latter trades more often and keeps a close record of accounts and trades. As one of those who meet any of the requirements one is simply to pay tax on the income after any expenses including any losses at one’s tax rate.
Meanwhile, When it comes to taxes for day trading in the US, one can either be identified as an investor or a trader.
Although the two terms may be used interchangeably, they are different drastically as it depends on the group they belong to. A trader commits his/her time, energy and resources in executing trades for at least 16 hours a week, trades nearly every day the market is open and keeps records to master the market tide while an investor is considered to be in the trade or business of buying and selling securities occasionally because he/she has a full-time job.
Invariably, when it comes to payment of tax, the trader can deduct his expenses, while the investor’s deductions are most times limited.
Taxes can not be evaded if one doesn’t want to risk an imposition of a fine or a jail term. But having highlighted the differences in various countries’ tax systems and their impacts, it behooves me to note some important tips, which will be helpful to day traders in their trading activities pari passu remittance of taxes.
Firstly, fighting against ignorance is the most expedient as there is a need for traders to get acquainted with the taxation systems peculiar to their countries and particularly to their trades. They also need to understand the section of the country’s law on taxation.
Every detail about each trade is cogent and guessing or leaving sections blank on your tax return may not be favorable. Some taxation systems may be so complex that one may need a professional to dissect the complications of such a system.
Besides, when in total confusion, a tax advisor is the best to consult. Although no one likes to pay them, but they are a necessary thorns in the human flesh as it is advisable to consult them once every year and regularly to seek advice.
On the other hand, a trader can as well monitor the payment of tax as the end of the tax year is fast approaching. Several kinds of software have been designed to simplify the calculations of taxes to be paid instead of having hundreds of trades that the taxman wants to see individual accounts.
Have you ever thought of that amount of paperwork, which causes serious headaches whenever the tax office wants to know your profit or loss from each sale and also demand an analysis of the security purchased, the date, sales proceeds, cost, and sale date?
There are several software and calculators, designed to help simplify the process by transferring all the required data from your online broker, into your day trader tax preparation software
Lastly, traders are enjoined to keep proper records of trading activities by making a note of, the security, the time and date of purchase, cost, sales proceeds, sale date and other relevant information.