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Day Trading & CGT

  • 05-02-2021 1:03am
    #1
    Registered Users Posts: 854 ✭✭✭ boardzz


    Hi I’m wondering about scenarios where you trade stocks within hours or even minutes.

    Are you able to offset losses against gains in this scenario. I heard something about four week rule. Not sure what that means.


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Comments

  • Registered Users Posts: 1,126 ✭✭✭ LawBoy2018


    boardzz wrote: »
    Hi I’m wondering about scenarios where you trade stocks within hours or even minutes.

    Are you able to offset losses against gains in this scenario. I heard something about four week rule. Not sure what that means.

    How often do you trade generally?


  • Registered Users Posts: 854 ✭✭✭ boardzz


    I started off buying and selling daily. Then changed to long term holds.
    All within the past ten months.


  • Registered Users Posts: 1,126 ✭✭✭ LawBoy2018


    You should reach out to an accountant imo. If you were deemed to be a trader, you'd be paying 52% income tax + you wouldn't be able to carry the losses afaik. Happy to be corrected on this if I'm wrong.


  • Registered Users Posts: 854 ✭✭✭ boardzz


    I’ll try and use the following as an example.

    Buy share A and sell 2 hours later - €5000 loss
    Buy share B and sell 2 days later - €5000 loss
    Buy share C and sell 5 months later - €10000 profit

    Is it:
    A. Zero profit or loss. Declare it and pay nothing.
    B. €10,000 loss is not deductible because owned for less than 28 days, pay CGT on €10000 profit.


  • Registered Users Posts: 69 ✭✭ inisfree0504


    This is exactly what was mentioned in the other thread.

    Revenue's website seems to say in black-and-white that those losses cannot be used.

    "Shares sold within four weeks of acquisition
    Shares bought and sold within a four-week period cannot be offset against other gains.
    You can only deduct the loss from a gain made on a subsequent disposal of same-class shares acquired within the four weeks."

    https://www.revenue.ie/en/gains-gifts-and-inheritance/transfering-an-asset/selling-or-disposing-of-shares.aspx

    That said, I'm wary of taking this at face value for a number of reasons, not least of which is that I cannot find where exactly this is set out in the legislation nor is this particular rule mentioned in any of Revenue's other guidance documents. The only reference to 'Disposals of shares or securities within 4 weeks of acquisition' I can find in the legislation deals with the bed-and-breakfast rule and the nuances of FIFO. Similarly, the section on allowable losses, as amended, does not specify such a prohibition on disposals not reacquired. I'm not an expert on reading legislation, and have extremely limited knowledge of tax rules in general, so this could be absolutely off the mark or I may be missing something big.

    What I will say is that it seems unsubstantiated enough to warrant running it by an accountant rather than taking as gospel as it could have very significant bearing on your overall liability. If anyone who does have knowledge/confirmation on this would like to weigh in, that would be much appreciated.

    For anyone curious the relevant section is here
    http://www.irishstatutebook.ie/eli/1997/act/39/enacted/en/print#sec581


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  • Registered Users Posts: 1,126 ✭✭✭ LawBoy2018


    This is exactly what was mentioned in the other thread.

    Revenue's website seems to say in black-and-white that those losses cannot be used.

    "Shares sold within four weeks of acquisition
    Shares bought and sold within a four-week period cannot be offset against other gains.
    You can only deduct the loss from a gain made on a subsequent disposal of same-class shares acquired within the four weeks."

    https://www.revenue.ie/en/gains-gifts-and-inheritance/transfering-an-asset/selling-or-disposing-of-shares.aspx

    That said, I'm wary of taking this at face value for a number of reasons, not least of which is that I cannot find where exactly this is set out in the legislation nor is this particular rule mentioned in any of Revenue's other guidance documents. The only reference to 'Disposals of shares or securities within 4 weeks of acquisition' I can find in the legislation deals with the bed-and-breakfast rule and the nuances of FIFO. Similarly, the section on allowable losses, as amended, does not specify such a prohibition on disposals not reacquired. I'm not an expert on reading legislation, and have extremely limited knowledge of tax rules in general, so this could be absolutely off the mark or I may be missing something big.

    What I will say is that it seems unsubstantiated enough to warrant running it by an accountant rather than taking as gospel as it could have very significant bearing on your overall liability. If anyone who does have knowledge/confirmation on this would like to weigh in, that would be much appreciated.

    For anyone curious the relevant section is here
    http://www.irishstatutebook.ie/eli/1997/act/39/enacted/en/print#sec581

    I love these tax threads! I learn so much.


  • Registered Users Posts: 807 ✭✭✭ Jimbobjoeyman


    If your holding period is pretty short maybe look into spread betting.
    Pretty much the exact same as using CFD's but since its legally considered gambling there is no tax to be paid on profits.


  • Registered Users Posts: 242 ✭✭ hottipper


    Bit risky also unless your a pretty good trader :pac:


  • Registered Users Posts: 188 ✭✭ Latro


    So if you are day trader, does it mean that any gains are taxable and losses are not losses for taxes purposes?


  • Registered Users Posts: 807 ✭✭✭ Jimbobjoeyman


    Latro wrote: »
    So if you are day trader, does it mean that any gains are taxable and losses are not losses for taxes purposes?

    Yes.

    It's essentially a deterrent to save people from themselves.
    If you happen to have a strategy that makes money the only real tax efficient way to do it is with spread betting.


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  • Registered Users Posts: 188 ✭✭ Latro


    Yes.

    It's essentially a deterrent to save people from themselves.
    If you happen to have a strategy that makes money the only real tax efficient way to do it is with spread betting.

    So let's assume someone has 100k euro broker account and day trades a lot.
    Every time different shares.

    During the year that person accumulated 300k profit and 270k loss and 30k broker fees, resulting in 0 net gains.

    Does that person have to pay 33%(or 51%?) on 300k gains resulting the account to be wiped out to 0 after taxes?


  • Registered Users Posts: 807 ✭✭✭ Jimbobjoeyman


    Latro wrote: »
    So let's assume someone has 100k euro broker account and day trades a lot.
    Every time different shares.

    During the year that person accumulated 300k profit and 270k loss and 30k broker fees, resulting in 0 net gains.

    Does that person have to pay 33%(or 51%?) on 300k gains resulting the account to be wiped out to 0 after taxes?

    no idea what the rate is as I'm not an accountant.
    But you are taxed on the 300k profit.

    As said above you need to hold a security for a reasonable period of time for it to be classified as a capital gain and thus usable to offset against your tax liability.
    The exception from what I've read above is trading the same share class within a window (open to correction).

    So at the end of the year you're not at zero but at a significant loss after tax is paid.


  • Registered Users Posts: 13 broccoli123


    boardzz wrote: »
    I’ll try and use the following as an example.

    Buy share A and sell 2 hours later - €5000 loss
    Buy share B and sell 2 days later - €5000 loss
    Buy share C and sell 5 months later - €10000 profit

    Is it:
    A. Zero profit or loss. Declare it and pay nothing.
    B. €10,000 loss is not deductible because owned for less than 28 days, pay CGT on €10000 profit.
    If you bought share "C" within 4 weeks time of purchasing both shares - "A" and "B", then you can use the loss of 10,000 to offset the gain resulting in no tax liability.


  • Registered Users Posts: 1,126 ✭✭✭ LawBoy2018


    If you bought share "C" within 4 weeks time of purchasing both shares - "A" and "B", then you can use the loss of 10,000 to offset the gain resulting in no tax liability.

    No, it would be 10,000 x 33% CGT = €3,300 tax liability (assuming that the annual exemption has already been used)

    According to the Revenue Guidance mentioned above, the losses associated with the disposals made within the 4-week rule may not be carried forward.


  • Registered Users Posts: 69 ✭✭ inisfree0504


    If you bought share "C" within 4 weeks time of purchasing both shares - "A" and "B", then you can use the loss of 10,000 to offset the gain resulting in no tax liability.


    With all due respect I think we're just making things up at this point. I'm not sure where you could possibly have found a basis for this interpretation of things.

    I've sent a letter on the matter to the personal finance columnist who does Q&As in the IT. Hopefully we'll get a reply/definitive answer in the coming weeks.


  • Registered Users Posts: 20 Crimson_Ghost


    Hi All,

    Thanks for contributing to this thread. I am currently querying this four week rule with Revenue. I have reviewed all documentation that I could find and I can’t see anywhere in the Tax Acts which limits offsetting losses against gains for short term share dealing (where shares are bought and sold within a short time frame – i.e. less than four weeks) other than the limitation under S 581 (i.e. repurchase of same shares after incurring a loss). However this limitation only seems to relate to where same shares are repurchased within four weeks and I can’t see how it limits offsetting losses where shares are not repurchased.

    If CGT is payable on short term dealing when a gain is made then in the spirit of Tax Law an equivalent loss should be allowed for offset (setting the four week repurchase rules aside per S 581 on the Tax Act).

    It seems in the US and UK there is a more structured tax system for Short Term Share trading. Also I’d be interested to know whether the Revenue are applying the same limitation in terms of offsetting losses to High Frequency Trading companies resident in Ireland where they make losses.

    It may be useful if the IT received a couple of letters on this topic. Look forward to hearing more on this and will keep the thread updated with my experience.

    Also I wanted to add - In the US, Canada, UK etc. there is no rule limiting offsetting short term losses (other than something similar to the loss and repurchase rules we have in Section 581 of the tax act). Those countries recognize the fact that a lot of people day trade for a living.


  • Registered Users Posts: 69 ✭✭ inisfree0504


    Very interesting you haven't found anything in the tax acts either and it's great you've queried this directly with Revenue.

    I know it's clearly stated on Revenue's website and it would be quite extraordinary if it were wrong - but I do have a legal background (again - not an expert/practitioner) and we were always taught never to rely on the info given by the bodies applying legislation as it is only their interpretation of things (albeit an authoritative one) but to always check the statute book itself.

    Another poster mentioned it was brought in at some stage 'a while back' but I have looked at amendments to the 1997 Act etc and can't see it there either.


  • Registered Users Posts: 20 Crimson_Ghost


    Yes you are dead right - it is always good to question the interpretation of the law because it can sometimes be incorrect or for the court to help resolve. The simple example given on the website is not in line with the law or the more detailed examples they give in the associated documents.

    In terms of them bringing it in a while back - yes you are correct there have been no amendments. If the other poster was talking to one of the same people as me (who also said this was "brought in a while back") then this person also told me not to worry about it as CGT would be deducted at source by the broker! He was getting mixed up between Dividend Withholding Tax and CGT and also mixing up Irish Share Dealing vs. US Share Dealing so I disregarded all of what was said and continued my line of enquiry by writing.

    For people doing Day Trading as a living in other countries, it would be nearly impossible most of the time to make a living out of it if they couldn't offset short term losses against gains. They are not prohibited in this regard and so I don't see why people should be restricted in Ireland if it is something they are good at and want to make a living out of.


  • Registered Users Posts: 20 Crimson_Ghost


    Still waiting on a response from Revenue.
    They did initially respond to quote their website at me even though my query was in relation to the specific section of the Act which prohibited netting short term losses against gains (excl. bed and breakfast, rebuy scenario).

    I went back on the response and again requested they direct me to the specific section of the law on this. This was some weeks ago and haven't heard back since.

    I'll be ringing to chase up next week.


  • Registered Users Posts: 598 ✭✭✭ pioneerpro


    Still waiting on a response from Revenue.
    They did initially respond to quote their website at me even though my query was in relation to the specific section of the Act which prohibited netting short term losses against gains (excl. bed and breakfast, rebuy scenario).

    I went back on the response and again requested they direct me to the specific section of the law on this. This was some weeks ago and haven't heard back since.

    I'll be ringing to chase up next week.

    A civil servant won't give you tax advice in this context and possibly open themselves up to liability. I'd say registered financial advisor or you're pissing in the wind. I've taken the 4 week rule to heart, for better or worse, and just acknowledged Ireland doesn't want you to build wealth like other countries (€1,270 CGT threshold? Jokable). You've presumably seen this bloody article recently calling for a speculation tax. Sickening.

    https://www.thejournal.ie/readme/column-gamestop-financial-transactions-tax-victor-duggan-5346346-Feb2021/


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  • Registered Users Posts: 1,776 ✭✭✭ Rothmans


    I could be misinterpreting the above link to the revenue site, but, from my reading if it, it only addresses the 4 week rule with respect to it's application to the CGT regime, not Income Tax.

    As in, you are disallowed from writing off a loss for a share held for less than 4 weeks against a different class of share, in order to reduce your CGT liability. I.e. you must pay income tax on any gains on shares against which you wish to apply this loss I.e. you must pay the marginal IT rate on such gains rather than trying to get away with paying the more favourable CGT rate.

    In other words, I see it as a method of discouraging traders from trying to make their profits come within the scope of the CGT regime.

    The above link just appears to prohibit using short term losses against gains (for shares from other companies) for the purpose of capital gains tax. It doesn't prohibit the use of short term losses against gains for the purposes of Income Tax (which is what what you should be paying anyway if you are a trader). It would be analogous to saying a sole trader should be basing his income taxes on all of his revenue, as opposed to his profit, which would make no sense.


  • Registered Users Posts: 598 ✭✭✭ pioneerpro


    IANAL or ACA or whatever, but I'm pretty sure you're wrong. They'd spell it out.

    You dispose of an asset, you pay capital gains. Simple as. They spell out the 4 week rule for stock explicitly. The only thing that counts as 'income' would be dividends (52% at that... christ)

    If you're PAYE and trading on the side you can hold for a month or go jump is my understanding.

    Have a good perusal here:

    https://www.askaboutmoney.com/forums/tax.6/


  • Registered Users Posts: 1,776 ✭✭✭ Rothmans


    pioneerpro wrote: »
    IANAL or ACA or whatever, but I'm pretty sure you're wrong. They'd spell it out.

    You dispose of an asset, you pay capital gains. Simple as. They spell out the 4 week rule for stock explicitly. The only thing that counts as 'income' would be dividends (52% at that... christ)

    Unless it is trading income, which is exactly the point I'm making. I'm suggesting that, in making this rule, the Revenue reasoning is 'why would a person be buying or selling shares within such a short time-frame, unless they were actively engaged in trading them?' - It's likely a measure to limit the CGT rate to genuine investors as much as possible IMO, not just some arbitrary rule.
    Remember - length of period of ownership and frequency of similar transactions are two factors which the Revenue consider in determining whether income is in the nature of a trade or not.
    If you're PAYE and trading on the side you can hold for a month or go jump is my understanding.

    That's just a rewording of what I said really. .i.e. it's just not allowed for CGT purposes (which doesn't mean that it wouldn't be allowable for IT purposes).


  • Registered Users Posts: 3 devils_avocado


    Rothmans wrote: »
    I could be misinterpreting the above link to the revenue site, but, from my reading if it, it only addresses the 4 week rule with respect to it's application to the CGT regime, not Income Tax.

    As in, you are disallowed from writing off a loss for a share held for less than 4 weeks against a different class of share, in order to reduce your CGT liability. I.e. you must pay income tax on any gains on shares against which you wish to apply this loss I.e. you must pay the marginal IT rate on such gains rather than trying to get away with paying the more favourable CGT rate.

    In other words, I see it as a method of discouraging traders from trying to make their profits come within the scope of the CGT regime.

    The above link just appears to prohibit using short term losses against gains (for shares from other companies) for the purpose of capital gains tax. It doesn't prohibit the use of short term losses against gains for the purposes of Income Tax (which is what what you should be paying anyway if you are a trader). It would be analogous to saying a sole trader should be basing his income taxes on all of his revenue, as opposed to his profit, which would make no sense.

    This is an interesting perspective. Legally though I don't see on what basis Revenue could seek to enforce this unless (as others have commented) there is some provision (other than s581) which sets out the rule they base the stated position on.

    To put it another way, Revenue can't arbitrarily decide that someone who sells for a loss within 4 weeks is a trader who's loss is subject to income tax, while also not making gains made from sales within 4 weeks similarly charged. (More generally I don't see how they could determine someone is a trader based solely on something as arbitrary as this). Also if the less than 4 week losses are to be set off against other gains for income tax purposes, how to you determine what those other gains are that are subject to income tax? Surely either someone is a trader or they are not (unless you're saying all gains from shares then become subject to IT rather than CGT)


  • Registered Users Posts: 598 ✭✭✭ pioneerpro


    (unless you're saying all gains from shares then become subject to IT rather than CGT)

    Disposal of an asset class counts for CGT, CFDs count as gambling, and Dividends count as Income Tax. But there's a tonne of stuff that falls in between.

    If you sell naked puts or covered calls, what does that fall under?
    If you split a unit of a SPAC and end up with a common and a warrant with a composite value more than the unit, where does that fall?
    And can you offset the brokerage fee for splitting it (other than as a business expense like your commissions) if you're a PAYE and also trading?

    Like they will happily interpret it anyway they want is my understanding, and charge you interest and penalties whilst you try and sort it out through the scant legal avenues available to you.


  • Registered Users Posts: 1,776 ✭✭✭ Rothmans


    This is an interesting perspective. Legally though I don't see on what basis Revenue could seek to enforce this unless (as others have commented) there is some provision (other than s581) which sets out the rule they base the stated position on.

    To put it another way, Revenue can't arbitrarily decide that someone who sells for a loss within 4 weeks is a trader who's loss is subject to income tax, while also not making gains made from sales within 4 weeks similarly charged. (More generally I don't see how they could determine someone is a trader based solely on something as arbitrary as this). Also if the less than 4 week losses are to be set off against other gains for income tax purposes, how to you determine what those other gains are that are subject to income tax? Surely either someone is a trader or they are not (unless you're saying all gains from shares then become subject to IT rather than CGT)

    Absolutely agree. Without specific statutory authority/authority from csae law, Revenue can merely offer their guidance and interpretation (so called 'Badges of a Trade', I would imagine, would be high among their considerations)

    Particularly with regard to your second paragraph, other jurisdictions are keen to argue that there is a high threshold to pass to be regarded as a trader. In the case mentioned below, the guy conducted 300 transactions per year, and was still not regarded as a trader. From a government's point of view, they don't want a massive number of hobbyists being able to write their losses off against their ordinary income. As the interesting linked article argues, this could be 'catastrophic' for the exchequer.

    However, the below article relates to the UK. While you would think the Revenue might have a similar attitude, it is important to bear in mind that, not only is the rate of CGT higher in Ireland, the CGT exemption limit in the UK is over 11 times greater than the paltry €1270 limit allowed here. Therefore, the proportion of tax the UK authorities would actually take from hobbyists under the CGT regime would obviously be significantly less than the Revenue take here. This, to my mind, may result in the Irish Revenue having a slightly different take on it here.

    https://tax.bloomsburyprofessional.com/blog/income-vs-capital


  • Registered Users Posts: 3 devils_avocado


    Rothmans wrote: »
    Absolutely agree. Without specific statutory authority/authority from csae law, Revenue can merely offer their guidance and interpretation (so called 'Badges of a Trade', I would imagine, would be high among their considerations)

    Particularly with regard to your second paragraph, other jurisdictions are keen to argue that there is a high threshold to pass to be regarded as a trader. In the case mentioned below, the guy conducted 300 transactions per year, and was still not regarded as a trader. From a government's point of view, they don't want a massive number of hobbyists being able to write their losses off against their ordinary income. As the interesting linked article argues, this could be 'catastrophic' for the exchequer.

    However, the below article relates to the UK. While you would think the Revenue might have a similar attitude, it is important to bear in mind that, not only is the rate of CGT higher in Ireland, the CGT exemption limit in the UK is over 11 times greater than the paltry €1270 limit allowed here. Therefore, the proportion of tax the UK authorities would actually take from hobbyists under the CGT regime would obviously be significantly less than the Revenue take here. This, to my mind, may result in the Irish Revenue having a slightly different take on

    That case is very interesting thanks. Agree about the two different approaches here and in the UK


  • Registered Users Posts: 598 ✭✭✭ pioneerpro


    Rothmans wrote: »
    From a government's point of view, they don't want a massive number of hobbyists being able to write their losses off against their ordinary income. As the interesting linked article argues, this could be 'catastrophic' for the exchequer.

    Which is all when and good, but you're leaving out a key point - casual traders, in fact everyone in the UK over 18 has an annual £20,000 ISA allowance (april 5th - april 5th IIRC).

    You can use all of this for a stocks & shares ISA if you want, or you can split it between stocks & shares and any of the other types of ISA inclusive of cash ISAs or other asset classes.

    So a dialogue in relation to capital gains tax allowance differences between the two jurisdictions really needs to take this into account when you're inferring points about 'hobbyists' (i.e. what the rest of the world calls retail traders). Intraday rules accounting for # of trades in a given period, and how it also affects margin, come into play for the UK as well when you cross that threshold. Ireland basically tells you to go jump.


  • Registered Users Posts: 1,776 ✭✭✭ Rothmans


    pioneerpro wrote: »
    Which is all when and good, but you're leaving out a key point - casual traders, in fact everyone in the UK over 18 has an annual £20,000 ISA allowance (april 5th - april 5th IIRC).

    You can use all of this for a stocks & shares ISA if you want, or you can split it between stocks & shares and any of the other types of ISA inclusive of cash ISAs or other asset classes.

    So a dialogue in relation to capital gains tax allowance differences between the two jurisdictions really needs to take this into account when you're inferring points about 'hobbyists' (i.e. what the rest of the world calls retail traders). Intraday rules accounting for # of trades in a given period, and how it also affects margin, come into play for the UK as well when you cross that threshold. Ireland basically tells you to go jump.


    I don't mind calling people hobbyists, retail traders or casual traders. I'm one myself. That's just semantics.

    ISAs are a fantastic idea. However, I don't see your point. Any growth in ISAs are free of tax, whether it is in the form of capital gains or deposit interest (lol) much like a pension fund. The fact that ISAs are an option in the UK bolsters the point I've made in my previous post, rather than detracts from it, as you appear to be suggesting. It provides the taxpayer greater scope to reduce their tax liability on capital gains in respect of shares.

    You might find the tax regime in Ireland to be burdensome. I do too, especially when it comes to Capital Gains. But we have to arrange our affairs in accordance with the taxation landscape within which we find ourselves, and that's how best to frame responses on this thread i.e. based on the way things are, rather than how we'd like them to be.


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  • Registered Users Posts: 598 ✭✭✭ pioneerpro


    Rothmans wrote: »
    I don't mind calling people hobbyists, retail traders or casual traders. I'm one myself. That's just semantics.

    Ah i'm not picking, and I stress this, you're definitely in the top 1% here in terms of balanced and neutral assessments and tone. Just that framing it as a 'hobby' or a 'casual' only helps normalise the sad reality of Ireland vs most of the developed world who can manage their pension funds and engage in things like FIRE by building wealth through investment.

    Here we can't even depend on compounding interest from basic financial instruments like ETFs due to deemed disposal rules. Managing wealth and hedging against the future should be a basic part of financial literacy. Here it's subject to utterly draconian barriers to entry that have denoted property as the only acceptable investment and have ended up, in part, contributing to a major housing crisis.
    ISAs are a fantastic idea. However, I don't see your point. Any growth in ISAs are free of tax, whether it is in the form of capital gains or deposit interest (lol) much like a pension fund.

    It's to do with this statement:
    it is important to bear in mind that, not only is the rate of CGT higher in Ireland, the CGT exemption limit in the UK is over 11 times greater than the paltry €1270 limit allowed here

    Which goes a long way to highlighting the inequality, but misses the salient point imo, which is touched on here[
    From a government's point of view, they don't want a massive number of hobbyists being able to write their losses off against their ordinary income.

    If you combine the CGT and the ISA, you realise that the composite tax free stock speculative gain allowance in the UK is actually higher than the Irish median net income. From that point onwards, any comparison between the two jurisdictions is null and void and serves no purpose, as that single fact nullifies the 'ordinary income' writeoff argument completely imo.
    But we have to arrange our affairs in accordance with the taxation landscape within which we find ourselves

    And sad as it is to say, highlighting the inequality and proposing domiciling in a different jurisdiction for people who wouldn't even be considered 'high earners' has to be part of that conversation in 2021. There's a reason why the startup culture is so poor here, why basic perks are subject to BIK, and why the housing market is overheated - and its part of the social acceptance of this state of affairs, even by the relatively financially literate.


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