You might have heard stock market investors talking about share traders and share investors. These are two different types of stock market investors in terms of strategy, but this also has a significant impact on an investors tax implications.
NZ Tax Law defines two types of investors in shares: Traders and Investors. As usual with tax, the difference is grey and separated by “intention” – though it’s the IRD who will ultimately decide what your intentions were, so you’re going to want your intentions to be crystal clear.
What Is An Investor?
An investor is someone who buys shares with the intention of keeping them long term. They are investing in a company to enjoy the growth of a company with a view to getting an income as an owner of the company or having a long term exit plan.
Being an investor is arguably less stressful because investors don’t sweat the daily ups and downs of the stock market caused by market sentiment, as much as Share Traders do.
Investors typically use Financial Analysis (FA) techniques to justify their purchase, and try to purchase quality well run companies with good growth prospects, or speculative stocks.
From a tax perspective, investors do not pay Capital Gains Tax (CGT) in NZ.
What Is A Share Trader?
Share Traders buy shares with the view of playing the share market. They buy the lows and sell the highs, with lots of trades. They use Technical Analysis (TA) techniques and spend a lot of time looking at graphs to determine where the share price of a stock might go. They may also do Short trades.
Share Traders tax on their earnings at the end of the year, but I assume can recover their costs if their investments make a loss (you’ll have to talk to an accountant to confirm this).
It’s possible to be an Investor and accidentally become a Share Trader, say if you buy shares with the intention of investing, but then have to sell because you need the money or market conditions become unfavorable and you decide to exit, or if you’re learning and make some incorrect purchases that you need to remove from your portfolio. Again, your accountant will be the best person to advice you on this.
