Lombard loan and professional trader: is it a problem?

Investing / Others
1

Hello,
so we often had the discussion about the “professional trader status” that, in practically all cases, can be neglected.
However I was wondering: I just read this post

and find this margin loan an interesting option. I use Swissquote and I think they call it Lombard loan there, but it is essentially the same according to my understanding. I would also like to use it, but much much lower percentage than it is mentioned in this post (so I would use less than 25% of my portfolio value). The reason is, I would like to invest a bit larger sum (“lump sum investing”) at one time. My sister inherited the house from our parents and therefore has to pay me half of it, and owes me roughly 200k and is paying monthly, so I get a regular monthly payment anyways but I would like to invest a larger sum at once, and then use the payments of my sister to pay back the loan. But I am still worried about the professional trader status. Could this be a problem in this particular case? I see that the criteria for bein non-professional clearly mention that you do not invest on credit.

2

If you make sure that the margin interest you’re paying is lower than the taxable dividend+interest income you receive, there should be no tax concern. (It likely wouldn’t be a problem even if it’s a bit higher but then you’re out of the safety zone).

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3

interesting. Is it also not a problem if I use part of the margin loan for other stuff than buying stocks? or what if I buy stocks that don’t pay a dividend?

4

Money is fungible. There isn’t really a difference between first buying e.g. a car with cash and then using a margin loan to buy more stock than what is left in cash vs. first buying stock with cash and then taking out a margin loan and buy a car with that.

It’s about the total in a (tax) year, as I understand it. If the total taxable dividend/interest income of your stocks, bonds, funds etc. is higher than the total margin interest you pay in the same year, there should be no issue. If a large part of your stock investments aren’t paying dividends, it may get difficult to achieve that, especially with the higher rates of Swissquote compared to IBKR, but it shouldn’t per se be an issue to hold stocks that don’t pay dividends.

5

As long as you check all exclusion criteria of chapter 3 in the Kreisschreiben 36 (German) you are safe.

Having no dividends, and no interest, but paying margin interest will breach #4. Breaching the exclusion criteria just enables tax authorities to claim that this is self-employment and you should pay accordingly. That doesn’t mean a judge will agree, especially if it doesn’t look like self-employment (increasing the mortgage on your home to buy a Ferrari probably doesn’t).

The federal supreme court judgement BGR 2C_868/2008 (German) which is mostly the basis for Kreisschreiben 36 is a nice (and rather understandable) read. A married couple gave money to an asset manager. The manager made a lot of gains with derivatives, short-selling, Forex with high volume and frequent trades. The federal supreme court explains what they mean by “frequent”, “high-volume”, and “gainful (self-)employment”. If you can read German or are able to use a translator this is recommended reading.

6

thanks, will read it!

in fact, I am not self employed and, even with my stocks that pay dividends, I could by no means live off them. I also sell call options and was worried in the beginning, and asked the tax office. They told me, as long as I am employed and cannot live from my dividends or call options, they won’t even look at the individual trades and not consider it professional. So in this regard it is good, even though I have already breached one of the criteria (“options are only used for hedging”). However the lombard would breach another one of the criteria, for this reason I was unsure. On the other hand, I will try to keep the amount way below 25%, to have lower risk and being able to pay it back as quickly as possible with the regular payments that I get from my sister. (The house she inherited was an eaarly inheritance, and she has to pay me out half of it.)

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7

so, if I understand correctly, it should be no problem, right?
but we cannot know for 100% sure, so it is in this regard quite a bit of gambling. Also I read the supreme court judgement and they said the couple is self-employed traders, even though they aren’t and just hired some guy who did the trading for them.
So for this reason I consider this super dangerous terrain, and unfortunately something that is absolutely useless for private traders :sleepy_face: