share trading as business income Advantages and Disadvantages

Declaring trading as a business income has both pros and cons. Here are some key points to consider: 

Pros:

1. Tax Benefits: When trading is treated as a business income, traders can avail of various tax deductions and benefits allowed for business expenses. This includes deducting expenses such as brokerage fees, platform charges, research expenses, and other related costs from their taxable income, which can help reduce their overall tax liability.

2.  Carry Forward Losses: If trading results in losses, treating it as a business income allows traders to carry forward the losses to future years. These losses can be set off against future profits, reducing the tax burden in subsequent years.

3.   Business Deductions: As a business, traders may be eligible to claim deductions for business-related expenses such as office rent, utilities, equipment, and professional subscriptions. These deductions can lower the taxable income and potentially result in tax savings.

4.  Utilising Tax Slabs: By declaring trading as a business income, traders can potentially take advantage of lower tax rates applicable to businesses, particularly for individuals falling under higher income tax slabs.

Cons:

1. Compliance Requirements: Treating trading as a business income entails additional compliance responsibilities. Traders need to maintain proper books of accounts, record all transactions, and adhere to business-related tax regulations. This may require professional accounting assistance and incur additional costs.

2.               Business Losses: Trading as a business income means that losses can only be set off against business income. If the trader does not have sufficient business income or incurs losses consistently, the ability to offset losses against other sources of income may be limited.

3.               Self-Employment Tax: Depending on the jurisdiction, traders declaring trading as a business income may be subject to self-employment taxes or social security contributions. These additional taxes can increase the overall tax liability.

4.               Higher Tax Rates for Short-Term Capital Gains: If trading involves frequent buying and selling of assets within a short period, the profits may be treated as short-term capital gains, which are subject to higher tax rates than business income. This could result in a higher tax liability compared to treating it as a capital gain.

Do you classify yourself as a trader, investor, or both?

Coming back to our original discussion

Investor: an individual who makes investments with the aim of earning returns in the form of dividends.

Trader: an individual who engages in buying and selling activities with the objective of making profits based on the increase in prices.

As an investor, you can take advantage of claiming your delivery-based equity gains/profits as capital gains. Conversely, if you are a trader, that income is classified as business income with its own advantages and disadvantages as previously outlined.

It is necessary to view F&O trading as a non-speculative business and intraday equity trading as speculative activity. This means, when filing IT returns, you will be required to use ITR 3 no matter if you are salaried or not. All profits or losses from this type of trades should be declared as a business income.

Most people are unaware that it is a good practice to report losses on trading exchanges. Pretending this activity does not exist could result in difficulties if there is an IT investigation. When the AO requests a meeting to discuss one’s IT returns, it is likely due to a system or algorithm noticing trading activity without its being reported in the ITR.

For equity delivery based investments, holding stocks for a year or more will typically earn you a dividend, and even if you don’t receive one you can still report it as an investment and take advantage of the long term capital gain exemption. On the other hand, if you are buying and selling stocks in quick succession – although there is no hard and fast rule on that – it’s best to consider them as non-speculative business income rather than STCG.

One should remember that classifying income from equity trades as business income instead of capital gains is advisable, especially if trading on the markets is your only source of income or you are engaging in more moderate trading activity. On the other hand, if you primary source of income is a salary or some other business venture, then you may find it easier to classify your equity trades as capital gains even if they are done more frequently.

The circular has thankfully clarified that you can be both a trader and an investor. This means you can have stocks for the long-term, such as investments, as well as those bought with the intention of conducting short-term trades. However, it’s essential to distinguish between trading and investing activities when filing your taxes. Therefore, simply having a large number of short-term trades won’t automatically convert all of your investments into trades and subject those gains to business income taxation.

Likewise, if you are engaging in F&O or intraday equity trading, it is obligatory to categorise yourself as a trader. However, you can still report your long-term investments under the capital gains category to take advantage of LTCG being exempt from taxes.

Whether you choose to be an investor, trader, or both, it’s important to bear the above points in mind and talk to a chartered accountant before filing your returns.

It might appear confusing, but rules are only devised for those who would look to break them. So long as you’re mindful of the IT department’s key considerations while filing returns and have a good intentions, it’s quite straightforward. However, make sure to stay consistent with your classification; avoid altering how you identify yourself from investor to trader when declaring short-term equity trades.

If you adhere to these regulations, rest assured that the taxman need not be feared.