ARE SHARES TAXABLE INCOME?

Are shares taxable income? It’s something that many New Zealand investors ask

The answer depends on how you acquired the shares, what income the shares produce, and why you hold them.

A common misconception is that every gain from shares is taxable. New Zealand does not have a comprehensive capital gains tax. However, some share-related income is taxable, and certain share sales can also create taxable income.  The easiest way to understand the rules is to separate the various ways shares can be acquired and the income they generate.

 

Shares Themselves Are Usually Not Taxable Income

Owning shares does not automatically create taxable income.

In many situations, the shares themselves are simply an asset. Tax usually arises when:

• You receive employment-related shares from your employer.
• You receive dividends.
• You sell shares in circumstances where the sale proceeds are taxable.
• Special tax regimes apply, such as the Foreign Investment Fund (FIF) rules.

For most New Zealand investors who hold shares as long-term investments, the focus is generally on the taxation of dividends rather than the taxation of share price increases.

Shares Received From Your Employer

Many employers offer shares to staff through employee share schemes, restricted stock units (RSUs), or similar arrangements. These shares are treated differently from shares you purchase yourself.

When Are Employment Shares Taxable?

Shares received from an employer are generally taxable when they vest. Vesting occurs when the shares become yours without restriction. Before vesting, you may lose the shares if you leave your job or fail to meet certain conditions.

When the shares vest:

• The market value of the shares generally becomes taxable employment income.
• Your employer will often account for PAYE obligations.
• The value of the vested shares forms part of your income for tax purposes.

For example, suppose an employer grants an employee 100 shares worth $20 each on the vesting date. The employee generally derives taxable employment income of $2,000 at that point.

What Happens After Vesting?

Once the shares have vested:

• Dividends received on the shares are generally taxable.
• Future increases in value are usually not taxable for an ordinary investor.
• A later sale often does not create taxable income if the shares are being held as investments rather than trading stock.

Therefore, there are two separate events:

1. Taxable employment income when the shares vest.
2. Taxable dividend income if the shares pay dividends.

The later increase in value will often fall outside the tax net for an investor.

Shares You Purchase Yourself

If you buy shares with your own money, the purchase itself is not taxable income. Buying an asset does not create income.

For example:

• Purchasing $10,000 of NZX-listed shares is not taxable.
• Purchasing $50,000 of overseas shares is not taxable.
• Purchasing shares through Sharesies, Hatch, Interactive Brokers, or another platform is not taxable.

The acquisition simply converts cash into an investment asset.

Dividends From Purchased Shares

While purchasing shares does not create taxable income, dividends usually do. A dividend represents a distribution of profits from a company to its shareholders.

If you own shares and receive dividends:

• The dividend is generally taxable income.
• New Zealand companies typically deduct withholding tax before payment.
• Foreign dividends may require additional reporting and foreign tax credit calculations.

Many investors mistakenly focus on share price movements while overlooking dividend taxation. In reality, dividend income remains one of the most common taxable amounts arising from share ownership.

What Happens When You Sell Shares?

This is where confusion often begins. Many people assume every profit from a share sale is taxable. Others assume none of it is taxable. Neither statement is always correct.

The General Rule For Investors

For many investors, gains from selling shares are not taxable.

If you bought shares because you wanted:

• Long-term growth,
• Dividend income,
• Portfolio diversification,
• Voting rights, or
• A retirement investment,

then a later sale at a profit will often fall outside the tax net.

For example:

• You buy shares for $10,000.
• Five years later they are worth $16,000.
• You sell them and realise a $6,000 gain.

In many circumstances, that gain will not be taxable.

The same principle generally applies to shares acquired through an employee share scheme after they have vested. Any increase in value after vesting often falls outside the tax net for investors.

When Can A Share Sale Become Taxable?

New Zealand tax law can tax profits from share sales in several circumstances.

Examples include:

• You acquired the shares with the dominant purpose of resale.
• You operate a share dealing business.
• The shares form part of a profit-making undertaking or scheme.

When these circumstances exist, Inland Revenue may treat the gain as taxable income.

The key factor is often your purpose and intention when acquiring the shares, together with your overall pattern of activity.

Dividend Reinvestment Plans (DRPs)

Dividend reinvestment plans cause considerable confusion.  Many investors assume that because they never receive cash, they have no taxable income. That is usually incorrect.

How A Dividend Reinvestment Plan Works

Under a DRP, the company generally:

1. Calculates a dividend.
2. Allocates that dividend to you.
3. Uses the dividend to acquire additional shares on your behalf.

For tax purposes, Inland Revenue generally treats this as though:

• The company paid you a cash dividend; and
• You immediately used the cash to purchase more shares.

The Tax Consequences

The dividend remains taxable income. The fact that the money never enters your bank account does not change the result.

For example:

• Dividend declared: $500.
• Dividend reinvested into additional shares.
• Cash received: $0.

You still generally have $500 of taxable dividend income. The newly acquired shares are not a second taxable event. The dividend creates the taxable income. The acquisition of the replacement shares simply uses that income to buy an investment.

What Happens When DRP Shares Are Sold?

The same general principles apply.

For most investors:

• The dividend was taxable when declared.
• The additional shares are not taxable when issued.
• A later gain on sale is generally not taxable.

This prevents the same economic benefit from being taxed twice.

The Difference Between A Shareholder And A Share Trader

This distinction is extremely important. Many investors describe themselves as share traders simply because they buy and sell shares occasionally. However, Inland Revenue does not classify someone as a share trader merely because they make a few trades.

What Is A Shareholder?

A shareholder generally acquires shares as an investment.

Typical objectives include:

• Long-term capital growth.
• Dividend income.
• Portfolio diversification.
• Retirement savings.
• Wealth accumulation.

Shareholders typically focus on the performance of the business rather than short-term price movements.

What Is A Share Trader?

A share trader carries on a business of dealing in shares or acquires shares primarily to profit from resale.

Common indicators include:

• High volumes of transactions.
• Frequent buying and selling.
• Short holding periods.
• Detailed trading strategies.
• Systematic trading activity.
• A focus on short-term price movements rather than dividends.

No single factor determines whether someone is a share trader. Inland Revenue looks at the overall picture.

Tax Consequences For Investors

For ordinary investors:

Taxable

• Dividends.
• Certain foreign investment income.
• Employment share scheme income.

Often Not Taxable

• Capital gains on investment shares.
• Growth in portfolio value.
• Most profits from long-term investment share disposals.

Deductions Often Limited

Investors generally cannot claim a broad range of costs against non-taxable capital gains. This distinction becomes important when comparing investors with share traders.

Tax Consequences For Share Traders

Share traders operate under very different rules.

Sale Profits Are Taxable

If you are carrying on a share trading business, profits from share sales generally become taxable income.

For example:

• Buy shares for $20,000.
• Sell them for $28,000.
• Profit of $8,000.

An investor may not pay tax on that gain. A share trader generally includes the $8,000 as taxable income.

Sale Losses May Be Deductible

The opposite also applies. If a share trader suffers a loss, that loss may generally be deductible.

For example:

• Buy shares for $20,000.
• Sell them for $15,000.
• Loss of $5,000.

A share trader can often claim that loss as a deduction. An ordinary investor typically cannot deduct a capital loss on investment shares.

Trading Expenses May Be Deductible

A share trader may also claim deductions for expenses incurred in earning taxable income.

Potential examples include:

• Trading platform subscription costs.
• Market data subscriptions.
• Accounting fees relating to the trading business.
• Interest on money borrowed for trading activities.
• Home office expenses where the requirements are met.
• Internet costs where there is a business connection.

The ordinary investor generally has far fewer deduction opportunities.

Can You Be Both A Shareholder And A Share Trader?

Yes. A person can hold some shares as long-term investments while trading other shares for profit. This situation arises quite frequently.

For example:

• An investor may hold dividend-paying bank shares for retirement.
• The same person may actively trade technology shares for short-term gains.

In principle, the investor can treat the two portfolios differently. However, practical problems often arise.

Why Separate Legal Entities Are Usually A Good Idea

When someone acts as both a share trader and a long-term investor, record-keeping becomes critical.

A mixed portfolio can create uncertainty about:

• Which shares belong to the investment portfolio.
• Which shares belong to the trading portfolio.
• Whether a particular sale relates to investing or trading.
• The taxpayer’s original purpose when acquiring the shares.

These disputes can become difficult to resolve years later.

A Better Approach

Many investors choose to use separate legal structures.

For example:

• One entity holds long-term investments.
• A separate entity carries on trading activities.

This approach provides clearer evidence regarding intention and purpose.

It also helps establish:

• Which shares generate taxable trading gains.
• Which shares form part of a long-term investment portfolio.
• Which expenses relate to trading activities.

While separate entities do not automatically determine the tax outcome, they often make the position much easier to support if Inland Revenue asks questions.

Common Misconceptions About Share Taxation

Myth 1: All Share Gains Are Tax-Free

Incorrect. Share gains can become taxable when:

• You are a share trader.
• You acquired shares principally for resale.
• You participate in a profit-making scheme.

Myth 2: All Share Gains Are Taxable

Also incorrect. Many long-term investors sell shares without generating taxable income.

Myth 3: DRP Shares Are Tax-Free

Incorrect. The dividend funding the purchase remains taxable income even when no cash is received.

Myth 4: Employment Shares Are Tax-Free

Incorrect. Employment-related shares generally create taxable income when they vest.

Myth 5: Calling Yourself An Investor Makes The Gain Non-Taxable

The tax outcome depends on the facts. Inland Revenue looks at conduct, purpose, and overall circumstances rather than labels.

Final Thoughts

The question “Are shares taxable income?” does not have a simple yes-or-no answer. The correct answer depends on how you acquired the shares and what type of income they produce.

For most New Zealand investors:

• Buying shares is not taxable income.
• Dividends are generally taxable income.
• Shares received from an employer are generally taxable when they vest.
• Dividend reinvestment plan dividends remain taxable even when reinvested.
• Profits from selling investment shares are often not taxable.

However, the rules change significantly for share traders: A share trader generally pays tax on trading profits but can often claim deductions and trading losses. An investor usually does not pay tax on capital gains, but generally cannot claim capital losses.

If you both invest and trade, keep careful records and strongly consider using separate legal entities for each activity. Clear separation can make it much easier to demonstrate which shares belong to your investment portfolio and which belong to your trading business.

 

Disclaimer: This article provides general information only and does not constitute tax advice. Share investments can also be subject to special rules, including the Foreign Investment Fund (FIF) regime and employee share scheme rules. If you want to read about managed funds, see this article. Seek professional advice for your specific circumstances. Contact us today