L6 - SIMPLE Flashcards
What is the key question in Lecture 6?
Whether a profit is trading income (taxed as income) or a capital gain (taxed under capital gains rules).
Can a profit be both trading income and a capital gain?
❌ No – it must be one or the other (mutually exclusive).
Why does it matter if it’s a capital gain?
Capital gains usually have lower tax rates and more exemptions.
What case confirmed that profit from a one-off resale could be trading?
Edwards v Bairstow (1956)
What case confirmed the mutual exclusivity of income and capital gains?
Simmons v IRC (1980)
What helps the court decide if it’s a trade or not?
The 9 Badges of Trade
🏷️ Badges of Trade (just the key ones)
Q: Does an isolated (one-time) transaction usually suggest trade?
❌ No – it’s less likely to be trade.
Does borrowing money to buy something suggest trade?
✅ Yes – shows a business-like approach.
Does doing work on an item before selling it suggest trade?
✅ Yes – like fixing up a house to sell.
What’s the most important badge of trade?
The taxpayer’s intention at the time of buying the asset.
If someone intended to sell something quickly for profit, what is it?
That’s likely a trading activity.
Can a trade intention be just a backup plan?
✅ Yes – as long as it exists, even as a secondary purpose.
What happens if the taxpayer changed their mind later and decided to trade?
It becomes a trading asset, but only from the moment the intention changed.
How is profit calculated if intention changes later?
✅ Yes – but you can’t expect to make a loss on purpose.
Are illegal businesses still taxed as trade?
✅ Usually, yes – like selling illegal goods.
are immoral trades taxed?
✅ Yes – e.g. prostitution profits are still taxable.
