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Online Share Trading

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Investing and taxes

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louisg
Super Contributor
Consider this example. You have a short term trader (Mr Trader) and a long term investor (Mr Investor). They both going to trade/invest for 3 years. Mr Investor buys and holds a share for 3 years and one day (CGT). Mr Trader buys at the beginning of each year and sells at the end of each year for 3 years. Assume they are both in the top tax bracket and investing/trading in their own capacities. Mr Investor has managed to increase his investment 20%/year and therefor will have a total return of 72.8% less 10% capital gains tax = 65.52% over 3 years or 18.29% AFTER TAX return a year. Now the problem for Mr Trader is that he/she must pay 40% income tax and in order to achieve the same return as MR Investor he/she must get a return of about 31% before tax in order to achieve an AFTER TAX return after 3 years of 65.52% That means that MR Trader MUST OUTPERFORM MR Investor by about 50%. This is one of the reasons why I prefer a long term strategy. PS IF one factors in the transaction fees it makes it even more difficult for MR Trader.
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84 REPLIES 84
louisg
Super Contributor
I meant to put this as a new topic. I would appreciate anyone's thoughts, or corrections if any.
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Werner_1
Super Contributor
when i started investing, my mentor stressed the point on not churning ones portfolio for that reasons, very valid point made!
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SimonPB
Valued Contributor
you're forgetting that as a trader SARS says it is income and hence costs are deductible. Such as trading fees, losses, etc.
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niemand
Contributor
Simon, How many txan's before SARS starting traeting one as a trader? Is there a number? Thx
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Werner_1
Super Contributor
is it true what i believe, if one sells the share before 3 years, SARS says you are a trader? revenue tax then applies, and you can deduct costs, etc?
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Shaun_Siddall
Super Contributor
Werner you are correct. A lot of guys still getting away with CGT i suppose we need to see what happens with the 2008 returns. As simon said trading you can claim a lot of expenses in the production of the income. Computer wear and tear, internet, subscriptions, telephone the list can go on... You should be trading through a CC and then tax planning becomes quite exciting between declaring income as a salary vs. leaving cash behind and a divi and loan accounts etc....
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Werner_1
Super Contributor
louisg, i would like to discuss something with you via email, if you like please email me [email protected]
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louisg
Super Contributor
Correct Simon. Costs (transaction fees that is)also come off when you work out your base cost for CGT. The trader still has a great disadvantage when it comes to taxes though. max 40% against max. 10%.
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louisg
Super Contributor
My understanding is that CGT will apply if you hold the share for longer than 3 years, no argument(although I'm sure there are exceptions). However it does not mean that all shares sold within 3 years will be considered as income. It will come down to your INTENTION at the time you bought the share. For example if you can prove that you bought the share for the capital gain, but for whatever reason need to liquidate your assets (say you emigrating)then SARS may allow you to pay CGT.
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geordie1
Super Contributor
Agree 100%.However you can invest long term as an individual and trade as a cc and you can get the best of both worlds-the expenses you can claim as a cc are fairly extensive as long as you can justify them correctly and it allows you to invest in 'taxeable' investments more efficiently-the introduction of passive income tax sometime soon may put an end to that perk.
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Shard
Super Contributor
Think they will go for this on my warrants?
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G_V_V
Super Contributor
The other day I bought futures and sold them a day later. I invested R2500 on initial margine and made R1000 the next day. That is a return of 9,125,000% annualy.
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G_V_V
Super Contributor
Excuse me that's 14600%, microsoft's calculator always plays tricks be warned.
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john_1
Super Contributor
Louisg..the magic you are mising is GEARING...on almost any given day I make trades using the alsi..(1 contract is about R250000 market exposure) so I am actually trading about R3 million a day with 12 trades. If I make only 0.1% on the trades relative to that exposure I will make = R3000 a day. If I trade like that for 200 days(a year in trading days) I make R600000 a year. But the market has only moved 20% on my market expousre( 3 000 000 x 20% = R600 000). So I pay 50% in taxes costs etc..I still make R300000 a year..on a 20% market move....To answer your question I do live off what I make in the market.
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john_1
Super Contributor
Said a little simply a 20% market move on the index( a little over the satrix average with 12 contacts yields R600 000 a year in income. 12 contract is only R120 000
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john_1
Super Contributor
One last thing LG...I can make that 20% in any dirrection. or any combination of long and short I desire...So on any given day I can be long short and back to long with all or some of my contracts...
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john_1
Super Contributor
Sorry 12 contracts is 228 000 ( I trade on half magin hence the mistake.)
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Not applicable
Hi, I do not agree in total. If you know you are a trader, get another vehicle like a CC to trade in. Tax is 29% & Capital gains tax 14.5%. Than the CC can pay out interest to the members, say you and your husband, R 32 000. Your vehicle that is needed to go to the courses and registerd in the CC depreciation can be deducted Also you can deduct, telephone bills, investment courses etc... Thus you can have also a long term portfolio in your own name and not be seen as a trader. Best of both worlds.
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john_1
Super Contributor
To put the thing into perspective....As an investor you profit from company earnings and the markets responce to those earnings...As a trader we profit from volitlity and the markets emotions around that volitlity..the two things are inta linked but mutually exclusive..
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