Being classified as a professional trader

Taxes
141

Why would that be any different ? If you hold shares for 10 years you are surely not a professional trader. A professional trader in their mind is someone doing day trading, playing with leverage and derivatives and whose income rely on his trading gains. If your profile is not the latter you have nothing to worry about.

Also keep in mind that you are not required to send your individual trades with the tax return, only the value of your holdings at end of year and any dividend or revenue from a self reinvesting fund (check the ICTax website). So again they will only start an inquiry on you if you post an increase in taxable wealth that cannot be justified by your work income. Each year around the same period the forum sees an influx of people asking questions around that topic when we are still to see someone actually testify here that he was classified as a professional trader. I remember a press article saying that per year they had less than 10 people in the whole Zurich canton to be investigated for this.

Final point, the Swiss tax authority is not the IRS, only if you commit fraud will you be prosecuted, if you forget something in your return and they realize it you only risk paying back what you owe with some penalty but you will not go to prison. Really, this topic should not prevent you from sleeping.

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142

Hello fellow mustachians, I have searched the forum but I haven’t found the specific answer to this situation.

If I understand correctly, it is possible for the tax authorities to consider you as a professional trader if more than 50% of your income comes from selling stocks, dividends being considered as income.

Let’s consider this scenario:

I reach my lowest Fire number, let’s say 1 million CHF in VT stocks to make it easy, I don’t have any other source of income. If I follow the 4% rule and can’t go below that because this is what I need, that means living of 40’000 CHF / Year.

1st year: dividends are about 2% => 20’000 CHF, I sell 2% of my stocks and get another 20’000 CHF.

In this case I’m good, my income (dividends) is 50% of the total.

Now, for the following years, something is not clear. More specifically regarding dividends.

If I understand correctly, dividends are not distributed as a percentage of your stock portfolio current value, but as a fixed amount per shares. Meaning that even though my overall stock portfolio value may grow year after year, the amount of stocks will diminish as I sell them, therefore the dividends distributed will diminish.

So for year 2 and so on, the value of stocks I sell will be higher than the dividends I get, therefore taking the risk of being considered as a professional trader.

Again, for the sake of simplicity, let’s say in year 7, I’m getting 26’000 CHF from selling stocks and 14’000 CHF from dividends. In this case I’m above the 50% income and may be considered as a professional trader. This will of course change the way I’m taxed dramatically.

Is my assumption correct or am I missing something, is there any way around this?

Thanks in advance for your insight.

143

I think you haven’t fully read all those threads you mention. This has been discussed many many times.

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144

„Die entsprechende Beurteilung erfolgt hierbei auf Grund sämtlicher Umstände des konkreten Einzelfalls“

Tax authorities have defined criteria that lets them (and you) definitely rule out professional trader status.

They are in no way intended to be used for the reverse conclusion (even when you‘d technically violate one).

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145

At all the people here having an interactive brokers account: Do you have a margin or a cash account and in case you have a margin account, have the the tax authorities ever asked you about it?

146

I have a margim account and the tax authorities never asked me anthing.

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147

Out of curiosity, how do you declare a margin account on your tax return?
It’s a private account for the tax office, isn’t it?

148

If you use margin, then put the negative cash balance (on31 dec) as debt and interest paid in the associated interest column.
If you generate an activity statement for whole year, these numbers will be on on the first page.

149

Thanks for the info, it makes sense as long as the loan is on money that doesn’t belong to you.

I’ve never used a margin account. I had thought that the tax office would consider it as a loan rather than a debt. If everything is indicated on the activity statement, at least the situation is clear.

150

A loan is a type of debt, so I don’t understand what you want to say here?

151

It seems to me that the tax office distinguishes between a loan and a debt in the sense that a debt is made available for interest and a set repayment date, whereas a loan can in theory remain open for life.

For a margin account, I imagine that as long as the account is positive, there’s no obligation to repay the loan, is there?

152

What do you mean by that ? At least in my tax declaration form (in TI) I don’t see such difference.

From the perspective of the broker or of the authority ? And what do you mean by “as long as the account is positive” ?

153

I don’t see such a differentiation in my tax return, I also don’t see why tax authorities should care whether there is a repayment date or not. What matter is the amount of debt you have now, as it reduces your taxable wealth and the interest you paid, as it reduces your taxable income.

What do you mean with positive?
Maybe for your understanding, if you have a margin loan at IB, you won’t have a separate account for the margin, but rather your cash accounts will be negative. You also don’t say “I take a margin loan of e.g. CHF 10’000”, you just withdraw from your cash account, the balance gets negative and you have to pay interest on it.

Your overall portfolio will always be positive and as soon as you breach the margin requirements, you’ll get a margin call from IB to pay back part of the margin loan until you fulfill the margin requirements. If you don’t pay back within a certain timeframe, they’ll start selling your positions to cover the loan.

154

No you won’t. They are known for this. They will start liquidating your positions as soon as margin requirements are breached. Can’t blame them, this is the policy that helped them to stay afloat for 50 years while other brokers went down due to the excessive leverage of their clients.

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155

Thanks for the correction, I somehow assumed they work thr same way like other brokers. But anyway my leverage is so low that it would take a Black Monday squared to trigger a margin call xD

156

Thanks for the explanation. I consulted again the documents of the tax office of my canton, and indeed, the tax office considers a loan as a debt. In both cases, on the tax return, both are to be indicated in the debt category. It was a mix-up on my part.

As for the margin loan, as I said earlier, I’m not an expert in this field. When I mentioned “as long as the account remains positive” it was in the sense that a margin call applied and therefore there was a decrease in the portfolio value. In any case, I think it’s essential to educate myself on how margin loans work, it’s an interesting system but one that requires a good knowledge :grinning:.

157

It’s actually not that complicated IMHO, but you need to be extremly cautious when using it. Leverage is dangerous, even genius fail (e.g. Long-Term Capital Management).

158

And what ist when I am 65? Then I have no income only AHV, can I sell all or a large position of my portfolio? Thanks!

159

You overthink it really, as long as you are not trading for a living you are fine.

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160

surely you can’t be

then you are retired. :stuck_out_tongue: