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.