How Trading Records Assist in Compliance and Tax Filing?

Regular traders carry out hundreds to thousands of trades in a month or a year. If you have been trading part-time or full-time in the securities market, your trading volume is probably substantial when compared with the average retail trader. 

However, at this juncture, it is crucial to address a very important question: Do you maintain adequate trading records? 

If you do not record your transactions and maintain the required books of accounts, you are not alone. Many traders skip this vital step and suffer unexpected consequences later. In this article, we take a closer look at how trading records can assist in compliance, tax filing and more. 

Let us begin by addressing a crucial point: are trading gains considered capital gains or business income? 

Trading Profits: Business Income or Capital Gains? 

Generally, the norm is that any profits earned from the sale of shares are classified as capital gains. If the holding period of the shares is less than 12 months, the profits are considered short-term capital gains (STCG), and if the holding period exceeds 12 months, they are long-term capital gains (LTCG).

However, for traders engaging in significant trading activity, it is permissible to consider the short-term gains as business income. In such cases, however, any current shareholdings will be classified as stock-in-trade. As for the profits from shares held for over 12 months, traders can still classify them as LTCG. The caveat is that once this classification is chosen, traders must adhere to it in the subsequent assessment years as well.

Top Reasons to Maintain Trading Records

Now that you know how profits from trading activity are generally permitted to be classified, let us examine the key reasons to focus on maintaining adequate trading records. 

• Easier Tax Calculations

Whether you decide to classify your profits as capital gains or business income, you need to have sufficient records to make tax calculations easier. This is particularly true if you have a high trading volume during the financial year because you need to track several hundreds or thousands of trades. 

Having organised records makes it easier to categorise your trades, sort the outcomes into gains and losses and find the taxable income. You can then apply the relevant tax rates and pay any self-assessment tax or capital gains tax due on time.

• Quicker Tax Filing

Tax filing is a mandatory requirement for anyone with income that exceeds the basic exemption threshold of ₹2,50,000. If you are a heavy-volume trader with significant profits during the year, you need to file your Income Tax Return (ITR) on time. Even if you have incurred losses, tax filing helps you carry them forward and set them off at a later date. 

With clear and comprehensive tax records, you’ll find that tax filing becomes easier and more efficient. You can quickly compare necessary data, enter accurate information in your tax returns and avoid the last-minute rush or confusion. 

• Set-off and Carry Forward of Losses

If you classify your profits and losses as capital gains and losses respectively, you can carry forward your capital losses and set them off against future capital gains. Both short-term capital loss (STCL) and long-term capital loss (LTCL) can be carried forward for 8 assessment years.  However, while you can use your STCL to set off both long-term and short-term capital losses, LTCG can only be used to set off long-term losses. 

To be eligible for the carry-forward and set-off benefits, you must file your ITR on time for the relevant assessment years. Diligent maintenance of trading records can help you with this. 

• Compliance with Recordkeeping Norms

Any individual who reports business income during a financial year must maintain adequate records as specified in section 44AA of the Income Tax Act — if their income is over ₹2,50,000 in any one of the three previous financial years. 

So, if you are reporting your short-term trading profits as business income, you need to maintain trading records and books of accounts to ensure compliance with this provision. The trading records generally required under this section include ledgers, cash books, journals, originals of receipts and bills and copies of the same. 

• Crucial for Taxpayers Subject to Tax Audit

In case you report your trading profits as business income, you will be subject to tax audit u/s 44AB if your income exceeds ₹1 crore (for normal business income) or ₹2 crore (for presumptive business income). 

As a part of this process, the tax auditor will verify aspects like the maintenance of complete and accurate books of accounts and the reporting of prescribed information. So, to comply with this procedure, you must ensure that you maintain the required trading records diligently. 

• Avoidance of Penalty

The Income Tax Act also requires that books of accounts must be maintained for at least 6 years from the end of the relevant financial year. Non-maintenance of such records may result in a penalty of ₹25,000. Maintaining trading records and books of accounts can help you avoid such unexpected penalties and charges. 

Conclusion

As the reasons explored above go to show, maintaining comprehensive trading records can be beneficial to you in many ways. From compliance-related benefits to trade performance tracking, this essential practice has many advantages to offer. If you are a regular trader engaging in part-time or full-time trading, ensure that you find a suitable software program or platform for bookkeeping and record maintenance purposes. This small additional step today will save you a lot of trouble tomorrow. 

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