Nature of Income: From Capital Gains to Business Income
Question:
A taxpayer was showing profit on sale of shares as capital gain in preceding FY, but now he wants to treat this income as business income as he has switched to full-time share and F&O trading. Can he do so?

Can You Switch from Capital Gains to Business Income?
Yes, a taxpayer can change the treatment of income from capital gains to business income, provided there is a genuine change in the nature of activity.
If earlier the shares were held as investment, profits were rightly shown as capital gains. However, once the taxpayer starts full-time share trading and Futures & Options (F&O) trading, the shares are no longer investments but stock-in-trade, and income from their sale will be treated as business income.

 Key Guidelines to Keep in Mind

1. Intention & Conduct
   • If the primary objective is to earn trading profits, it should be classified as business income.
   • If the shares are held as a long-term wealth-building investment, it falls under capital gains.
2. Consistency is Crucial
   • Once you switch to business income treatment, you should follow it consistently in future years.
   • Frequent switching between capital gains and business income may invite scrutiny from the Income Tax Department.
3. Disclosure in Returns
   • Proper disclosure in financial statements and income-tax returns is mandatory.
   • Maintain separate records for old investments (if any) and new trading stock.
4. CBDT Circular No. 6/2016
   • Listed shares held for more than 12 months may be treated as capital gains (at the taxpayer’s choice).
   • If shares are traded frequently with the motive of profit, the income should be shown as business income.
5. Treatment of F&O Income
   • Income from Futures & Options (derivatives) is always treated as business income, whether speculative or non-speculative.

Conclusion
👉 Yes, the taxpayer can switch from showing profits as capital gains to business income from the year he becomes a full-time trader.
✔ Ensure consistency in future years.
✔ Make clear disclosures in ITR and financials.
✔ Maintain separate records for investments and trading stock.
This approach is fully aligned with CBDT guidelines and ICAI’s Expert Advisory Opinions.

❓FAQs
Q1. Can I treat some shares as investments and others as stock-in-trade?
➡ Yes, but you must maintain separate portfolios and proper records.
Q2. Is F&O income always business income?
➡ Yes. Income from derivatives (Futures & Options) is always considered business income.
Q3. Will the Income Tax Department question the switch?
 As long as the change is genuine, consistent, and properly disclosed, the switch is valid.