Claiming a Tax Deduction for Share Losses

10 August, 2011 - The recent downturn on the stock market has thrown up the question of whether a person can claim a tax deduction on the loss.

As a general rule, an individual “share investor” cannot claim a tax deduction for losses on the sale of shares.  These losses are a capital loss and can only be claimed against a capital gain.

If a person can demonstrate they are a “share trader”, then losses from the sale of shares are deductible and can be offset against ordinary income such as salary and wages.

Rami Brass, Director of Tax Services, RSM Bird Cameron said, ‘There are a number of Australian Taxation Office Rulings and Case Law which try to define who is a share trader.’

The factors that indicate a person is a share trader include:

• The profit making purpose of the activity.
• Whether the person regularly and routinely engages in share trading.
• Whether there is a business plan, and the level of record and account keeping.
• Volume of operations and the amount of capital employed.
• The amount of time spent on share trading activities, although this indicator does not carry a lot of weight.

Mr Brass said, “There is no hard and fast rule, however, the greater the volume, repetition and capital employed and where the person displays a high level of professionalism in carrying out share trading activities, the more likely the person is a share trader”.

It is very important a person trading in shares obtains advice from his tax agent before deciding he is a “share trader”, instead of a “share investor”.”

Mr Brass did point out that although share investors cannot claim a tax deduction on losses from the sale of shares, interest on borrowings to acquire shares is tax deductible, and can be offset against the person’s taxable income.

In some cases the interest will remain deductible on the outstanding balance of the loan, even after the shares are sold and proceeds used to repay the loan.

For example, if a taxpayer borrowed $50,000 to purchase shares the shares are sold for $40,000 and the sale proceeds are used to repay the loan.  The interest payable on the outstanding loan balance of $10,000 will remain tax deductible.”