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What is a Trading Profit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 August 2016
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Trading profits are any profits realized on a position that is held for less than twelve successive months. In most countries, regulations governing the declaration of a trading profit require that the position meet certain criteria in order to receive this type of classification. The criteria are often stated more in terms of exclusions rather than identifying much in the way of defining what the return must involve in order to be classified as trading profit.

Outside of the universal understanding that trading profit can only take place with positions held less than one calendar year, the tendency is to identify other characteristics that must not be present in order for the return to be considered trading profit. These characteristics, referred to as exclusions, vary slightly from one nation to another. However, there is a core group of four exclusions that are very common.

First, trading profit may not be recognized on any one-off items that generate profit. Some examples of one-off items would be any profit made from selling off a business or subsidiary or any profit realized from a corporate restructuring. Any profits that are realized from a joint venture with another business would also be excluded. Changes in the fair value of any financial securities held by the company do not qualify as trading profit. Finally, profits realized from impairments cannot be classified as trading profit.

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Depending on the financial regulations in place in the country of origin, there may be very little difference between trading profit and the adjusted operating profit of a company. In fact, calculating both figures should yield a result that is very similar in nature. However, it should be noted that the calculation of operating profit might include some of the exclusions that are not considered part of the process for calculating trading profit.

One important thing to keep in mind about trading profit is that it does not carry any special type of rates when it comes to taxes. Unlike some forms of profit that are subject to long-term capital gains taxes, a trading profit is taxed using the standard income tax rates applicable for the period cited.

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