Wanted to point out a court ruling (in German) of the Steuerrekursgericht Kanton Zurich:
Steuerrekursgericht des Kantons Zürich - Endentscheid Kammer
The court ruling allows a glimpse into how a court would handle the interpretation of Kreisschreiben Nr. 36 - Gewerbsmässiger Wertschriftenhandel
A few observations for the safe haven test:
- when determining the 6-months-holding period they used FIFO
- it was irrelevant whether realized capital gains were >50%. The court just wanted to see if capital gains were needed to make ends meet
In this specific court case, the individual failed the safe haven test and therefore the court looked into the details. Main points that caused the court to label the individual a professional trader:
- leverage (>50% of the stock value was financed by loans), interest on loans > dividends received
- holding period < 6 months on 16% of the transaction value. Court specifically mentions that a “Stop-loss-strategy” is not something a private (i.e. non professional) investor would do.
The court also mentioned in its introduction, that the Kreisschreiben 36 actually only refers to “Direkte Bundessteuer”, i.e. not Kantonale/Gemeindesteuern. The court also mentions that the Kreisschreiben addresses (tax) authorities. It is a guideline, not a law. Nonetheless the court used the criteria in the Kreisschreiben 36 to examine this case.
Another case: Entscheid 18. Juni 2019
In this case the court overruled the tax authorities. The individual was not labelled a professional investor given that he passed the safe haven test.
Some take aways of the safe haven test:
- A small number of transactions <6 months were OK
- As in the case above, profits >50% of income were OK given that the individual didn’t need to capital gains to make ends meet
- In this specific case it was difficult to determine the holding periods. Therefore the court looked into trading frequency. The court understood that there could be partial fills, i.e. the court didn’t count the number of (intraday) executions but rather looked into the number of calendar days on which transactions happened. In this case, the individual traded slightly more than once a week. For the court, this appeared to be on the higher side of private investing intensity but still didn’t consider it professional trading intensity
There are already many discussions on the topic and the last one also involved some exchanges that one of the members had with the Zurich tax authority and clearly the risk is over estimated as long as you have a full time job. The starting point of those cases is always a discrepancy between the income of the tax payer and the increase of their declared wealth in a given year. If you earn 50k but your wealth increased by 500k you will be on their radar but otherwise I cannot see why the Steueramt would think you can be considered a professional trader…
This blog/forum is about financial independence and early retirement. Financial markets have been volatile and there were some decent moves across many asset categories. This, to me, implies that there is a few readers here that don’t have a day-to-day job (retire early), have decent amount of capital (financial independence) and potentially have large gains (volatile markets). For all of those individuals the above is very relevant. They all have no income but a big change in assets, i.e. they would be on the tax authorities radar. For me, personally speaking, I try my utmost to pass the safe haven test. That’s why I looked into the details.
There are also a number of court cases which look into a reverse situation, i.e. individuals who lost money wanted to be declared professional traders to be able to deduct the losses they incurred. For example case 2C_389/2018
In cases where the individuals actually produced losses from trading over a period of several years, the courts actually rejected professional trader status. To achieve professional trader status (to run a business so to speak) it is a necessity that there is an intention/ability to generate a profit. If that’s not the case, then this trading activity is labelled a hobby (like collecting/trading stamps, for example).
The court case on which the rules in Kreisschreiben 36 are based is the following 2C_868/2008
Something to note from this case:
- the court took into consideration whether the overall transaction volume was considered to be large compared to the overall wealth/assets of the individual