In an important decision for investors and the financial services industry, a tribunal ruled that a ‘day trader’ in stocks and shares was not ‘gambling’ but was engaged in a commercial trade. That crucial distinction meant that he was able to set off his stock market losses against profits made by his pharmacy business for Income Tax purposes.
The man’s confidence in his trading ability grew after he made £200,000 from day trading in a single year. He began to devote himself full time to short-term dealing in shares in large volumes and employed a locum to manage his pharmacy. However, his optimism proved misplaced: he came badly unstuck during the financial crisis and made consistent losses over a seven-year period.
On the basis that his stock market trades – which he carried out from an office above his pharmacy and which he had made no attempt to hedge – were speculative ‘gambling transactions’, HM Revenue and Customs (HMRC) refused to allow him to write off almost £650,000 of his losses against his business profits.
In upholding his challenge to that decision, however, the First-tier Tribunal found that his stock market activities amounted to a commercial trade within the meaning of Section 66 of the Income Tax Act 2007. He had dedicated himself full time to day trading and, with the benefit of hindsight, it was clear that his lack of success was not due to a want of application but to shortcomings in his level of skill.