Traders: Time to Think About Tax-Smart, Year-End Moves

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You can classify yourself as an Investor if you hold equity investments for more than 1 year and show income as long term capital gain LTCG. You can also consider yourself an investor and gains as short term capital gains STCG if your holding period is more than 1 day and less than 1 year.

In this chapter we will discuss on all aspects of taxation when trading is declared as a business income, which can be categorized either as:. Unlike capital gains there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income salary, other business income, bank interest, rental income, and othersand taxes paid according to the tax slab you fall in.

You can refer to chapter option short stock term trading taxes for tax slabs as applicable for Option short stock term trading taxes In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income speculative and non-speculative.

The reason capital gains is not added is because capital gains have fixed taxation rates option short stock term trading taxes salary, or business income. Now, I also have an additional income of Rs. I hope this example gives you a basic orientation of how to treat your option short stock term trading taxes and evaluate your tax liability. We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.

If you file your income tax returns on time July 31 st for non-audit case and Sept 30 th for audit case, you can carry forward any business loss that is incurred. Speculative losses can be carried forward for 4 years, and can be set-off only against any speculative gains you make in that period. Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

You carry forward non-speculative losses to the next 8 years; however do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period. In such case my tax liability for the year would be —.

I have a non speculative business loss of Rs. If you incur speculative intraday equity loss of Rs. I can carry forward speculative loss of Rs. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward.

Towards the end of a financial year you might have realized profits and unrealized losses. If you let it be, you will end up paying taxes on realized profits, and carrying forward your unrealized losses to next year.

This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital which goes away as taxes. You can very easily postpone this tax outgo by booking the unrealized loss, and immediately getting back on the same trade.

By booking the loss, the tax liability for the financial year would reduce. We at Zerodha are the only brokerage in India presently giving out a tax loss harvesting report, which will spot all opportunities for you to harvest losses. Click here to learn more. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock. Since you are not taking delivery, should it be considered as speculative similar to intraday equity trading? There are both schools of thought, one which considers it option short stock term trading taxes be speculative because no delivery was taken.

A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income. Paying advance tax is important when you have a business income.

When you have a business income you have to pay most of your taxes before the year ends on March 31 st. It could be more or less. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15 th pay for what was earned until then, and by March 15 th close to the year end, you can make all balance payments as you would have a fair idea on how you will close the year.

You can claim a tax refund if you end up paying more advance tax than what was required to pay for the financial year. Tax refunds are processed in quick time by IT department. You can make your advance tax payments online by clicking on Challan No. Also, here is an interesting link that helps you calculate your advance tax — http: You can also check this link to see how exactly interest or penalty is calculated for non-payment of advance tax.

Both these financial statements might need an audit based on your turnover and profitability. We will discuss more on this option short stock term trading taxes the next chapter. An audit is required if you have a business income and if your business turnover is more than Rs 1 crore for a financial year.

For equity traders, an audit is also required as per section 44AD in cases where turnover is less than Rs. There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc.

Ideally this audit should be done by the IT department itself, but considering the number of balance sheets out there it is surely impossible for IT department to audit each one of them. You the tax payer can use any CA of your choice. We will in the next chapter briefly explain how a CA typically creates these two statements. It also helps lenders evaluate credibility, and act as a check for any fraudulent practices.

Which ITR form to use? I have come across incidents where people have declared both speculative and non-speculative as capital gains to avoid having to declare business income, and not having to use ITR3. Taking a shortcut like this could mean a lot of trouble if called for an IT scrutiny.

Business expenses when trading — Advantage of showing trading as a business is that option short stock term trading taxes can show all expenses incurred as a cost which can then be used to reduce your tax outgo, and if a net loss for the year after all these costs, it can be carried forward as explained above.

Disclaimer — Do consult a chartered accountant CA before filing your returns. Audit is also required as per section 44AD in cases where turnover is less than Rs. I have two questions — 1 Is an audit required in case I am incurring loss and my turnover is less than 1 cr? But if your net income for the year is above 2. There is no need of calculating turnover for advance tax. Based on whatever profit you have made till the end of sept, dec, and March periods, just pay incremental tax accordingly.

Audit is based on your turnover. Since there is a loss and you fall under a tax slab, yeah audit is needed. Check all the chapters, audit is quite a simple thing. If I have a loss of 20, then i need to get it audited for which i will have to pay CA anotherSo more loss if you make a loss in trading. What a shame, Audit should not be there if there is loss. Advance tax is not required if income is computed under section 44AD; see Section of Income tax Act.

The taxes you are paying is transaction tax. Income tax still has to be paid. You need to add this 1lk to 3. Sir, first of all great article.

I have a personal question, please help me out. I don't option short stock term trading taxes daily. In whole yr, I might have placed less than orders in total. I do not wish to get my account audited and also not claim any loss in ITR 4. When do I have to pay tax and I option short stock term trading taxes to know about taxation charges as well as do I need to audit. I am just a stock trades. One more if earn above 1 crore in a single year what will be the taxation on that.

Trading is a business, so like every business you need to pay an advance tax every quarter on your expected year end income. IF you pay more, you can always get a refund. Tax is not on the turnover, it is on the net profits only. Turnover is to determine if you need a tax audit or not. Option short stock term trading taxes, Whether tax audit required in foll0wing case: Total trading turnover — more than 1 crore in FYbut incurred loss in trading.

Also, total income in same year is less than 2. Is tax audit required? Also — as a valued added servicecan Zerodha provide services of tax consultants to option short stock term trading taxes file returns of option short stock term trading taxes My Salary is — Rs.

In your case since no advance tax has been paid till now, for April 1st to March 31st point 3 below is applicable C and from April 1st this year till you pay the taxes point 2 B is applicable.

For deferment of advance tax. The said option short stock term trading taxes is levied 0. Hey Krish, sorry if I suddenly sounded like a chartered accountant putting up this section of the act. For advance tax not paid between April 1st to March 31st3.

Vishal, the penalty can be paid, but that will be black mark on your ITR. I have gone through your article about taxation. It has cleared many concepts. Can Zerodha provide any support for audit, CA? In such case, what advise would you give to beginners like me? I am salaried employee and I have been filling ITR1 form for option short stock term trading taxes 2 years.

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Short sales are a means to profit from market downturns or to hedge a position. Although a short sale is somewhat the reverse of buying a stock with the hope of profiting from an increase in stock price, the tax rules that apply to short sales are significantly different than those that apply to a long position. Tax law treats covered short sales differently from uncovered short sales. A covered short sale is one in which you own substantially identical securities , which includes not only the stock itself, but also any call or put options in which the stock is the underlying asset, or any other security that can be converted into the stock, such as convertible bonds, or any other property that would hedge your stock position, such as a futures or forward contract.

You are also considered to hold a substantially similar position in the stock if your spouse or closely related relative, or even a closely held corporation in which you are a major stockholder, also owns substantially identical securities. An uncovered short sale is one that is not covered as defined above. An uncovered short sale gain or loss is always short term, because the holding period is deemed to begin when the stock is purchased that is used to close out the short sale.

Since the short seller can only profit by buying at a lower price, he will wait until the day that he decides to close out the transaction to buy the stock, for it makes no sense to buy the stock back any sooner than that, since if the short seller believes that the price will go lower, he will wait until he thinks the price has reached its lowest point, then buy back the shares and close the short sale.

Before the tax law changed to disallow it, covered short sales were commonly used to postpone gains on long stock positions so that the lower long-term capital gains rate would apply. Specifically, you could sell short against the box, selling short stock that you already owned, so that your gains were protected until your long position could be sold, so that it would qualify for the long-term capital gains rate.

The term shorting against the box comes from the fact that, years ago, stockholders used to keep their stock certificates in safe deposit boxes. Whether the gain or loss from a covered short sale is short-or long-term depends on how long the stock or substantially identical property was held that was used to close the short sale. The gain or loss on an uncovered short sale is reported in the year that the position was closed out, even if settlement of the trade occurs in the following tax year.

Because you held the shares that were used to replace the borrowed shares for less than 1 day, your capital gain is short term. If you already own the shorted stock and the shorted stock was sold at a higher price than what you paid for the original stock, then tax law treats the sale as a constructive sale , even though you did not technically close out your position.

Gain is determined based on the short sale proceeds and a new holding period for the original stock begins on the date of the short sale. If the price received on the shorted stock is less than the tax basis of the your long position, then a gain or loss is reported when the short position is closed out.

If the shares of stock become worthless before the sale is closed, then the gain is recognized when the shares become worthless. However, a constructive sale does not have to be reported if the transaction was closed before the 30th day after the end of your tax year and the appreciated financial position was held, unhedged, for at least 60 days afterwards.

If a short sale is not closed by the 30th day of the following tax year, then it is deemed to have been closed on the earlier of either:. One thing to note is that you could buy stock against which you have a short position, but still not close out your position.

In other words, the mere fact that you bought stock that you have also sold short does not automatically close out the short sale until the shares are delivered to the broker with the instructions to close the short sale. Nonetheless, tax law treats the acquisition of the stock while a short position is held in the same stock as a closing of the short sale, even if it was not actually closed out.

Under these rules, the constructive sale treats the short sale transaction as if you had sold your original shares, and then immediately bought them back. If you continued to hold the long position, then a new holding period begins when the short sale is closed out.

Same as Case 1, but you close your short position on February 3, Year 2. The holding period for your long position now begins on February 3, Year 2 instead of January 5, Year 1 when you bought the original shares.

Both, the gain on the short sale and the gain on the long position must be reported for Year 2. Note that the profit on your original stock is considered short term, even though you have held it for more than 1 year.

When the short sale is actually closed, then the gain or loss is equal to the short sale proceeds minus the applicable tax basis. Your broker will report the short sale on Form B , and the transaction is reported in the tax return on Form , Sales and Other Dispositions of Capital Assets in the year that it was closed, even if settlement takes place in the next year.

If you buy a put in which you also own the underlying stock, with a term of 1 year or less, then any gain is considered a short-term capital gain. This rule also applies if the underlying stock is purchased after buying the put but before the disposition of the put. In either case, the holding period for the underlying stock begins on the earliest date of:. However, if the put is purchased along with the underlying stock, and it is identified as being covered by the put, then the short sale rules do not apply.

If the put expires worthless, then this cost is added to the basis of the stock. Because the shorted stock was sold, the lender of the stock no longer receives dividends paid by the corporation, but, instead, goes to the unknown buyer of the shorted stock. But since the lender of the stock is still entitled to dividends, the short seller must compensate the lender with what are called substitute payments in lieu of dividends.

Generally, payments of dividends are deducted by the short seller by adding the amount to the basis of the re-purchased stock. However, if a short sale position is held for at least 46 days, then you can claim an itemized deduction of the payments as investment interest. The stock must be held for at least 1 year in order to claim the dividends as itemized investment interest.