Do you need to pay taxes on stock trading profits?
Hong Kong is known for being a densely populated city with high property prices, and the cost of living is often heavy for its citizens. Many workers take advantage of their free time to invest in the stock market, and some even believe that stock trading can be more profitable than working. It is understandable that people want to earn extra income to support themselves. So, the common question is “do you need to pay taxes on stock trading profits?”.
Day trading vs. long-term investment
Day trading is a common short-term investment method where the holder does not hold positions overnight and closes their positions before the end of each trading day, profiting from minor price fluctuations within a single day. For stock traders who rely on day trading as their source of income, they may conduct multiple short-term trades in a single day, closely following market trends and making swift buy and sell decisions. If an individual conducts day trading transactions in their own name, it is considered an investment or speculative activity, and the tax department will not regard it as carrying on a business. Therefore, profits from day trading do not need to be taxed, and losses cannot be used as a tax deduction. However, if day trading transactions are conducted under a company name and the tax department considers it as carrying on a business, profits will need to be taxed, and losses can be used as a tax deduction.
In contrast, if an investment is intended for long-term growth and not frequently traded for profit, then it is considered as capital in nature. Since Hong Kong does not levy capital gains tax (CGT), as long as the stocks held can be proven to be long-term investments, there is no need to report them.
Can “long-term holding” turns into “short-term trading” due to special circumstances?
Unexpected events can occur in the stock market, and it can be as unpredictable. International news and major political crises can all have a significant impact on stock market volatility. If an investor intended to hold stocks for long-term investment but lost confidence due to market turbulence and sold them out of fear of a sharp drop in stock prices, then this “long-term holding” has unexpectedly turned into “short-term trading” and generated profits. Would this need to be reported?
In fact, as long as it can be proven to the tax department that the investor’s decision to sell was influenced by stock market fluctuations, and they held the stocks for only a short period before selling, rather than intending to profit from short-term trading, then they can be exempted from having to report it as a special circumstance.
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