If you buy shares with the intention to sell them at a profit, Inland Revenue (IRD) may consider you to be a share dealer or trader. Most investors don’t need to pay tax on any profits when they sell their shares, but if you’re a trader, that changes. Any money you make or lose from selling shares will count towards your total untaxed income for the year and impact how much tax you need to pay.
The IRD uses two tests to determine whether they consider you a trader:
You’re in the business of dealing shares:
If you regularly buy and sell shares with a level of professionalism, especially when a portion of the money you use to invest is borrowed
You invest with the intention of making a profit:
If you buy shares with the intention of selling them for a profit, or buy highly volatile shares to flip (e.g. you jumped on the GameStop rocket to the mooooon 🚀)
Confusing? Yes the law is a little vague.
New Zealand operates a ‘self assessment tax regime’ - it’s your responsibility to tell the IRD the correct amount of income you’ve received. If the IRD thinks you’ve got it wrong, they have a right to follow up, so it’s good practice to keep records of the intentions behind your buys and sells.
Here’s some examples:
If you own shares in a company that jumps in price and you sell them and bank the profits, that could be considered trading behaviour. If you owned those same shares and sold them to secure a deposit for a house, that probably wouldn’t be.
If you buy shares in a company because you think they’re about to rocket up in price and you’d be able to sell them for a profit, that could be considered trading behaviour. If you bought those same shares because you wanted to receive long term income from their dividend payments, they probably wouldn’t be.
Already paying FIF tax?
If you have over $50,000 NZD invested overseas and are paying tax under the FIF rules on shares you’ve traded, then you don’t need to worry about whether the IRD would consider you to be a trader. The FIF calculations include any gains you’ve made.
Note: Your tax obligations are unique to you - if you're unsure, we recommend you seek professional tax advice. Your situation may change over time; it’s your responsibility to keep up to date with changes.