Stock transactions and being classified as a pro trader

Hey!
In the last 6 months I’ve been consistently buying Vanguard ETFs. Initially I started with VT and then, after reading more, I figured I might be better off with VTI + VXUS, so I started buying VTI. Now I think I should get rid of the VT I have and switch to VTI + VXUS.
I read somewhere that you can be classified as a professional trader if you buy and sell the same stock in less than 6 months. That can’t happen if I sell the VT I bought in the last few months and buy VTI + VXUS instead, right?

Figured I’d check before going for it :slight_smile:

I’m sure you can buy and sell some stock without getting classified as a pro trader. Otherwise everyone who maybe played around with their ebanking would be…

The reasonable criterium is if you could permanently live from your shortterm stock speculations, without any other income.

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Just do it. Adjusting one’s investment strategy once in a while (even if last purchases were only recently) falls short of being a methodical approach that a professional investor would adopt.

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Can’t happen in your case, yes.

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Had same concern here. I was thinking about selling a big line but I bought it 2 months ago and I fear it can conduce to categorize me as a professionnel.
It’s hard being an active stock picker with this law, keep your stock 6 months when there is bad news or bad result could pretty unproductive.

I hope administration can’t consider you as a professionnel and tax all your gains when you are a early retiree and live only on your gains.
Let’s suppose you are extremely lucky (and clever for finding the right stocks :slight_smile: ) and your net win is +2M CHF after 10years. If you didnt close your position all this 10years long, closing it would mean it’s your only income. The law is pretty fuzzy.

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Doing this once is erratic.
Doing it 10 times is systematic.

:wink:

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There are more criteria involved than just the length of time which you hold securities for i.e. how often you do this, the amounts involved, the capital gains achieved, whether you invested your own money or other people’s money, and others. Holding for shorter periods occassionally shouldn’t trigger an audit unless the capital gain is substantial.

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Each tax office decides themselves when to classify someone as a pro trader. On a federal level there is a guidelines with 5 criteria that if you violate none of them you will never be classified as a pro trader. Those are:

  1. You hold securities for at least 6 months before you sell them.

  2. The transaction volume of all of your securities trades combined (total spent on purchases and total earned on sales) is not higher than 5 times the total value of your securities at the start of a tax year.

  3. Capital gains generated through securities trading do not account for a significant portion of your basic income. The rule of thumb: Capital gains should account for less than 50 percent of your net income.

  4. You use your own assets to finance the purchase of securities. Or: Taxable returns like interest and dividends are higher than interest owed on loans.

  5. If you invest using derivatives – and options in particular – these can only be used to hedge your own securities.

But it’s not a black and white thing. No sane tax office will categorize you as a professional trader for violating 1 or 2 of those criteria in a single year. I know people that have already fired and violate multiple of those criteria each year and are NOT classified as professional traders. It all comes down to your tax office and the one making the decision.

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Oh wow, this community is amazing. Thanks everyone for all the replies! It’s much clearer now!

Ultimately it comes down to the courts. The guidelines are based on court decisions. If you disagree with the tax office, you still have recourse to the courts. They aren’t idiots.

Sure, but if I get classified as a professional trader after violating multiple of those guidelines I would think twice about taking my case to the court.

I find double negatives hard to read. What you are saying with that sentence is that if you violate at least one of the criteria you could be classified as a pro trader.

Although violating just one or two guidelines will usually not result in the classification as a pro trader.

I don’t disagree.

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Sure, but what typical trader will violate anything except #1?

No 3 will hopefully at least occasionally be violated by anyone on a FIRE path coming close to their target net worth

No 4 will technically be violated by any investor with a mortgage (AFAIK). Debt allocation from a tax point of view ignores securitization, your mortgage therefore is not necessarily allocated to your house but rather in equal parts to your other assets (investments) too. But, tax authority won’t care 99.x% of the time until you take out a lombard loan (think of it that way: Your house might just as well be financed through a “lombard mortgage” compared to one backed by your income).

I myself will violate rules 1, 3 (hopefully), 4 and 5 this year, and yet I’m not too concerned at this point. In general, I myself came to realization after looking into it that the professional trader status is something exceptionally rare. If you aren’t a day trader or use sophisticated options strategies you should not face any issue in this regard (which isn’t to say that the tax authorities might investigate you further before coming to this judgement).

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Take into account that the primary factors, as explained by ESTV, are transaction volume, loans, and derivatives. Then:

3: You’d have to have some very large capital gains for that to be the case while still working, with large appreciations on very large holdings that you dispose of completely at one time.

Once you’re done working that may be different - since you’d be selling to cover lifestyle costs, but this isn’t a major evaluation point (as even the courts have confirmed).

4: technically yes, but not in spirit (and courts look at the spirit and not the technicalities) - unless you’re actively increasing your mortgage to finance trades (which is what has been highlighted in a few court cases on this topic).

I realize only just now that the guidelines are focusing on realized gains. In that case you are absolutly right, that should happen much less frequently, as one does not necessary have an asset re-allocation every other year.

Looking into it I also learned that tax authorities consequently prefer to use first-in/first-out method. I have to check what that means for me :thinking:

Follow-up: Completely different calculation in terms of realized gains FIFO vs total gains YTD, but surprisingly rather close result, i.e. still likely to be caught up in rule 3 (did some asset reallocation this year too). Will see what the tax man thinks, am still confident.

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