Resident tax expert Lee Hadnum answers readers’ trading tax questions.

Q: I frequently invest in UK shares and other financial investments and am concerned about any UK taxes even though I no longer live in the United Kingdom. I’m classed as non-resident and live in Australia. Will the UK-Australia double tax treaty apply to avoid any UK taxes on my UK investments? I declare all my income and gains in Australia, but to date have not declared any gains to the UK authorities.

A: On the basis that you’re classed as an ‘investor’ (as opposed to a ‘trader’) for UK tax purposes you would be within the scope of UK capital gains tax.

Most standard double tax treaties state that capital gains remain taxable only in the owner’s country of residence, except for land and property, which can also usually be taxed in the country where the property is located.

So investors in shares, CFDs, options or other financial assets would find themselves subject to overseas capital gains tax by virtue of any double tax treaty. In your case this would mean that Australia would have taxing rights over the capital gain on any disposals of UK shares and so on.

However, given that non-residents would be exempt from UK CGT anyway, it’s not actually giving you anything you wouldn’t already have.

In addition, if you used to be UK-resident and sold shares or other financial assets you held at the date of departure after you left the United Kingdom you could still be charged to CGT in the tax year of your return (unless you were abroad for a period of less than five tax years).

If you were classed as a ‘trader’ (as opposed to an ‘investor’) you’d then need to assess whether you were trading in the UK via a permanent establishment. If you were, you could be subject to UK tax on the trading profits even though you’re non-resident.

Deciding when there is a permanent establishment can be very complex. Although a UK agent could be classed as a permanent establishment, there is a specific exemption for UK investment managers and brokers. As such, in most cases there will be no permanent establishment under the terms of a treaty and there would be no tax in the country where the shares were located (the UK in this case). To answer your question, the double tax treaty will usually apply as follows:
• Investors in shares, CFD’s, options etc will be taxed in their country of residence on any gains
• Dividends received will be taxed in the country of residence
• Traders will also be taxed overseas unless they traded in the UK via a permanent establishment.

Q: I’m a US resident and have begun day trading shares both in the US and in foreign markets. Despite research, I’m still not sure exactly what my status is for US tax purposes. Do I file as a trader or investor? And what difference does it make to my tax liability?

A: There are two key advantages that trader status has over investor status.

First, unlike investors you can deduct business expenses that you incur in your trading activities. These will be included as business expenses on Schedule C (Business Profits).

If you have a loss on your trading activities, you can offset it against other income in the same year, carry it back for up to two years or carry it forward. Being able to offset trading losses against income from other sources can be very attractive for financial traders.

Second, you can elect for mark-to-market accounting to apply. This is only available to traders but still needs to be claimed (usually by 15 April of the current tax year). The benefits of the mark-to-market basis are that:
• You eliminate the $3000 capital loss limitation. For example, if you have a $20,000 loss, and you also have $50,000 in gross W-2 income from a day job, it will reduce your taxable amount from $50,000 to $30,000. If you don't have W-2 income, you would be able to carry back the losses and obtain a repayment of income tax.
• It eliminates the much-misunderstood 'Wash Sale Rule'. This rule prevents traders and investors from claiming a capital loss if they buy replacement stock 30 days before or after the sale of a security. If they do, they can’t deduct the loss. Instead, it is added to the basis of your replacement stock for tax purposes. However, if you buy the replacement stock after 30 days (i.e. 31 days or more) these rules do not apply.

However, the mark-to-market election is not always the best course of action. For example, if you have a substantial capital loss brought forward you may want to retain investment treatment to offset the capital loss in the future. In addition, traders who deal primarily in commodity futures and 1256 contracts often prefer to be taxed on the 60-40 tax split rather than under the mark-to-market basis.

In terms of your status, if you’re a full-time speculator, trader status should be applicable. If you’re a part-time trader it’s less straightforward. The IRS has been challenging trader status for part-time traders, particularly where they are incurring losses. Ensure you take detailed advice from a trading tax specialist.

Lee Hadnum is a Chartered Accountant and Chartered Tax Adviser, and is the Editor of the popular tax planning website for financial traders & investors www.traderstaxclub.co.uk. Email your questions to Lee at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.

If you have a question that you would like Lee to answer, please email it to This e-mail address is being protected from spambots. You need JavaScript enabled to view it

This article was originally published in the May/Jun 09 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2009, MarketSource International Pty Ltd. If you are not a subscriber, click here to subscribe, or to purchase this issue as a single back issue, click here.