Am I a Trader or an Investor?

One of most common questions that we are asked as advisors is whether an individual is trading or investing.

In order to provide an answer to this question, it is necessary to look at the 'badges of trade' to determine whether the activity is trading or investment in nature. In some cases, this is quite obvious but in many cases, particularly in this industry, there is no straight answer and therefore it is necessary to delve deeper.

The two main badges affecting financial traders are the motive of the individual and the transactions themselves.

Motives of the Individual

If the individual in question is looking to make a profit and thus undertakes other transactions in order to hedge any potential losses, this would be a significant factor in HMRC determining whether to treat the transaction or transactions as a trade.

Obviously both traders and investors look to make profit on each transaction that they make and so the idea that the sole motive in undertaking the transactions is relatively vague and in practice would not be solely relied upon.

Instead, other matters including whether the purchase of the particular item is an isolated event (pointing towards investment) or whether many similar transactions have been undertaken either before or since the transaction in question (pointing towards trade activities), particularly if the holding of each item is relatively short-term.

In addition it would need to be considered whether the taxpayer has this income as their sole form of income or whether they have other type of employment or self-employment income, as having other forms of income would suggest investment activities rather than trading activities, particularly if the number of transactions undertaken is fairly low and irregular.

The Transactions

If it is possible to see a trend of continuous and habitual activity, where the holding of each type of asset is relatively short with frequent transactions, again the pattern of the transactions would suggest a trading activity particularly if coupled with other issues such as the income being the sole or main income stream for the individual or the use of hedging methods.

However, if the assets in question were acquired by way of inheritance or are sold because of financial emergency, it is less likely that these individual transactions would be considered as part of a trading activity

In any case, an overall opinion would be made based on all circumstances, the frequency of transactions and the motive of the taxpayer in question.


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