The Supreme Tax Court has rejected a claim for tax recognition of losses incurred in dealing in securities on the grounds that the operations were not part of a recognisable business.

The case was brought by a private individual with regular dealings on the money markets. He had installed a limited amount of equipment for this (television, computer with access to online market information etc.) and was now claiming that his losses had been incurred by way of trade, rather than through his private asset management. The tax office took the opposing view, with which the Court agreed.

Clearly, the Court arrived at its findings, at least in part, as a result of the taxpayer's inconclusive statements, ambiguities and unsupported assertions. However, it took the opportunity to set forth a few rules of thumb to distinguish dealing by way of trade from transactions in the course of private asset management:

  • If the taxpayer claims to be a trader in securities, his main activity will be in transacting in his own name but for the account of others. For this, he will need a permit under the Banking Act from the Financial Services Supervision Authority. Since such permits are only issued after exhaustive enquiries designed not least to establish that a proper control environment based on a division of duties exists, it will usually be clear that a permit holder operates by way of trade.
  • If the taxpayer deals only on his own account, he will not need a permit. He will be a trader ("finance business") if his manner of operating is typical for the trade, but will be seen to be acting privately where this is not the case.

Typical for the trade implies

1. dealing with market players direct as opposed to through one or more (in this case six) custodial banks

2. the activity must be his main business activity as opposed to being from facilities installed in his lawyer's chambers or accountant's offices

3. there must be at least a modicum of commercial organisation supporting the business.

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