Tax Matters – Retail investors in shares, are your gains taxable?

RETAIL investors made big waves on Bursa Malaysia in 2020 and at different times of the year; their participation went up as much as 43% of the daily trading volume. With the rise in the local stock exchange, retail investors made substantial gains last year.

Retail investors are individual, non-professional investors who invest in small amounts of shares from time to time with the objective of selling the shares either in the short term or long term. In majority of the cases, their intention is to build up their capital for retirement purposes, for their children’s education or for their future health needs.

The underlying intention of building up their wealth is to ensure that they have the funds for a rainy day since Malaysia does not have a comprehensive social security net when you are unemployed or retired.

Can the gains be taxed?

In Malaysia, only income is subject to tax. Capital gains on shares are not taxed.

When is the gain income and when is it capital?

Factors such as the intention of the individual retail investor at the time of the purchase, the frequency of the transactions, the holding period and source of funding the transactions will be some of the determining factors in deciding whether the profits are income or capital.

If the investor had bought the share to sell it shortly (say within days or a few months) and the investor regularly buys and sell shares, the gain could be treated as income and taxed accordingly. Financing the shares with borrowings may support speculation and therefore bringing the gains to income tax.

Is profit-seeking motive part an individual’s investment strategy?

If the shares have been bought with an intention to build up an investment, the gains on the realisation of the investment should not be subject to income tax. Individuals should be distinguished from a company because the main reason for an existence of a company is normally to make profits. However, the individual’s intention of trading in shares is usually to build up his capital. Here, the taxpayer has to show that he is attempting to build up his capital over a long term whenever the opportunity arises to realise profits.

What are the tax authorities doing?

There is no specific guidance issued by the Inland Revenue Board on this matter. The underlying basis on whether an individual should be taxed or not is based on case laws. Under the current situation, the taxpayers cannot be certain whether they will be taxed or not.

Generally, the tax authorities have not been taxing individual retail investors on their gains. The exception is when individuals are subjected to tax audits and tax investigations or when they are requested to produce capital statements or net worth statements, the gains from such transactions are usually raised as a matter to be taxed.

The problem is that the isolated individual retail investors selected for scrutiny are subjected to tax while the majority of the individual investors are not subjected to tax on such gains.

Our suggestion

As mentioned above, individual retail investors in the stock market generally tend to invest in the stock market with the intention of building up capital as opposed to benefiting from the short-term gains.

Unless it is evident from the taxpayer’s actions that there is an organised activity to trade in shares to realise gains, individual taxpayers should not be brought to tax on such gains. It is timely for the tax authorities to provide guidance or a public ruling on this matter.

This article was contributed by Thannees Tax Consulting Services managing director SM Thanneermalai.