Am I a Trader or an Investor?
One of most frequent questions that we are asked as advisors is whether the financial trading activity that is being carried out is trading or investing.
In order to provide an answer to this question, we need to look at the 'badges of trade' to determine whether the activity is trading or investment in nature. In some cases, it’s quite obvious but, in many cases, (as is what usually happens in this industry), there is no straight answer and there are several different points that need to be considered.
The two main badges of trade affecting financial traders are the motive of the individual and the transactions themselves.
Motives of the Individual
If you are looking to make a profit and undertake other transactions in order to hedge against any potential losses, this would be a significant factor in HMRC determining whether to treat the transaction(s) as a trade.
Obviously both traders and investors look to make profit on each transaction that they make so this cannot be the sole factor that is relied upon.
Instead, other considerations such as the number of transactions that are being carried out each month need to be taken into account.
Occasional one-off transactions would suggest an investment activity and a high level of transactions being undertaken each month would suggest a trading activity.
It also depends on the approach to the transactions as if these are being done in a regular fashion, i.e. for set hours each day, this would be classed as a trading activity as opposed to an ad-hoc fashion which would suggest an investment activity.
There are also various other considerations you need to make:
- Whether this income is your sole income or if you have another type of employment or self-employed. This would suggest investment activities rather than trading activities.
- Whether you have control over your trading decisions. If a fee is being paid to an adviser or company and they are making all the decisions about transactions, this would suggest an investment activity. Rather than if you were making all the decisions (this would a trading activity).
Distinguishing between the two can be very difficult. Especially as it is possible that the approach could change from year to year as circumstances change but we can help to ensure that the correct approach is being taken each year.
It’s important you discuss this through with an adviser (like us!) to ensure your income is taxed correctly.
Once you’ve come to the conclusion whether you are trading or investing, take a look at our following article which looks how both types of income should be taxed.
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