Trading Records for Compliance and Tax Purposes?

Seasoned and regular traders carry out hundreds of transactions in a month. In any given year, the trading volume for such traders may easily be in the thousands. As per the Income Tax Act, the profits on the sale of shares held for over 12 months are categorised as long-term capital gains (LTCG). However, the gains on shares held for less than 12 months can be considered short-term capital gains (STCG) or business income — as per the assessee’s discretion.

If you are a regular trader who decides to categorise such short-term gains as business income, the shares you hold will be considered stock-in-trade. Furthermore, it also brings in another crucial aspect to your overall trading experience; you need to maintain adequate trading records because you will be reporting it as business income.

Maintenance of Business Records under the Income Tax Act

According to section 44AA(2) of the Income Tax Act, individuals reporting business income need to maintain books of accounts activity if their income exceeds ₹2,50,000 in any one of the three previous financial years.

So, if your trading income has crossed this threshold, you need to maintain records like a cash book, journal, ledger and original as well as copies of bills and receipts for large transactions.

Tips to Help You Keep Trading Records for Compliance and Tax Purposes

Manual record-keeping is a thing of the past. With trading itself having gone entirely digital, the next logical step is to maintain your trading records online as well. Here are some useful tips to help you adhere to the record maintenance provisions under the Income Tax Act.

Use a Dedicated Software

Browse the market for software solutions and platforms that help maintain trading and business records. You need to look for specific features like automated data entry and sorting, trade tracking and profit or loss computations. It also helps to have premium features like report generation and the option to link the software with your trading account.

Organise Your Documents

Your trade-related paperwork is crucial for compliance and tax purposes. This includes documents like trade confirmations, trading account statements, order books and tax-related documents. Any expenses you are using as deductions must also be backed by the necessary originals and/or copies, so you can back up your claims with data.

Record Essential Details for Each Trade

Noting the essential details for each trade can be useful for compliance as well as personal record-keeping purposes. This includes recording the following details for every trade you make:

Date and time of the trade
Asset or security traded
Nature of the trade (buy or sell)
Buy or sell price
Quantity traded
Fees or commissions, if any
Separate Personal and Business Accounts

Many traders tend to link their personal bank accounts with their trading accounts. If you too are guilty of this practice, it may be time to reconsider this approach. Having a dedicated bank account exclusively for your trading activities makes it significantly easier to track the money going into your trades and the income/gains being generated thereon.

Reconcile Regularly

Your stock broker will also send you regular records of your trading activity in the form of transaction statements and Consolidated Account Statements (CAS). Ensure that you reconcile your personal trading records with these statements to identify any discrepancies or irregularities promptly. This will help you maintain accurate and complete trading records.

Maintain Specific Tax Records

Section 44AA requires certain specific records for tax purposes — like cash books, ledgers and originals as well as copies of your bills and receipts. You need to have these documents handy as well, so you can provide them to the assessing officer in case of any scrutiny. To make the process efficient, you can have separate folders for each type of record.

Backup Your Data

If you are storing your data digitally (as you may be, given the large volume of transactions), it is always prudent to backup the records regularly. In case you trade daily in the securities market, you can even set up a daily backup routine to ensure that none of your trade details are erased or lost due to a digital mishap.

Remain Aware of the Regulations

The regulations surrounding the maintenance of records for tax purposes have largely remained homogenous over the past few years. However, the Income Tax Department may revise the threshold limit of the income or introduce new provisions about the type of records required. To avoid any penalty, it is best to remain aware of the current regulations.

Conclusion

To sum it up, maintaining trading records is crucial for all kinds of traders — but especially so for those who trade in large volumes. The need to keep trading records also depends on whether you choose to declare your trading income as capital gains or business income. The pointers outlined above can help you maintain sufficient records of your trading activity in the securities markets.