The Federal Board of Revenue (FBR) has explained key tax definitions related to stock market transactions, aiming to help investors better understand their tax obligations, capital gains calculations, and compliance requirements.
These clarifications are provided under Rule 13L of the Income Tax Rules, 2002, as amended up to November 24, 2023, and are designed to ensure greater transparency, uniform tax treatment, and simplified interpretation of stock trading rules for both individual and institutional investors.
Why FBR Issued These Definitions
With rising participation in Pakistan’s stock market, especially among retail investors and online traders, tax complexities have increased. To eliminate confusion and prevent misreporting, FBR has outlined clear definitions for stock transactions, capital gains, derivatives, futures contracts, and borrowed securities.
These rules are particularly important for:
• Stock market traders
• Long-term investors
• Brokerage firms
• Tax consultants and auditors
• Portfolio managers
Key Tax Definitions Explained (Simple Guide)
Below is a simplified explanation of the most important tax definitions issued by FBR:
🔹 Borrowed Security
A borrowed security refers to shares borrowed under SECP-approved lending schemes, primarily for short selling, with the obligation to return the shares later.
🔹 Capital Gain
Capital gain is the profit earned when the selling price of a security exceeds its purchase cost.
👉 In short selling, capital gain means the difference between:
• Selling price of borrowed shares
• Price paid to repurchase shares for return
🔹 Capital Loss
Capital loss occurs when the purchase price exceeds the selling price, resulting in a financial loss.
🔹 Cost of Acquisition
This refers to the actual market price paid to buy a security, with special rules for:
• Right shares: Discounted issue price
• Inherited shares: Market value paid by the deceased
• Bonus shares:
o Ex-bonus price (if tax already paid)
o Value under section 236N
o Zero, in other cases
• IPO shares: Actual issue price
🔹 Consideration from Disposal
The market value received on selling a security.
🔹 Derivative Products
Financial instruments whose value depends on underlying assets, including:
• Futures contracts
• Options
• Cash-settled futures
• PMEX commodity contracts
Important Transaction Dates Defined
Correct tax calculation depends heavily on transaction dates. FBR has clearly defined these:
📅 Date of Acquisition
Depends on how the security is obtained:
• Electronic shares: Earlier of purchase date or CDC transfer date
• Physical shares: Earlier of sale date, possession, or registration
• Inheritance: Date of death or transmission
• Futures contract: Contract entry date
• Borrowed shares: Date of purchase to cover short position
📅 Date of Disposal
• Electronic shares: Sale or CDC transfer date
• Physical shares: Sale date or removal from company records
• Futures: Exit date
• Borrowed shares: Short-selling date
📅 Futures Contract Dates
• Entry Date: Date securities are bought or short-sold
• Exit Date: Date securities are sold or repurchased
📅 Option Contract Dates
• Exercise Date: Date option is exercised
• Exercise Price: Cost paid to buy the underlying asset
Holding Period & Tax Impact
The holding period is calculated under Section 37A of the Income Tax Ordinance, 2001 and plays a critical role in:
• Determining capital gains tax rates
• Differentiating between short-term and long-term gains
Who Is Considered an Investor?
An investor includes:
• Individual traders
• Institutional investors
• Brokerage firms investing on their own account
Tax Jurisdiction Clarified
The jurisdiction of tax authority depends on:
• The location where securities business is conducted
• In multiple locations, the principal place of business will apply
Why These Definitions Matter for Investors
Understanding these rules helps investors:
✅ Calculate accurate capital gains
✅ Avoid penalties and tax disputes
✅ Improve tax planning
✅ Ensure lawful compliance
Frequently Asked Questions (FAQs)
❓ Does FBR tax short selling?
Yes. Gains from short selling of borrowed securities are fully taxable.
❓ Are bonus shares always tax-free?
No. Tax treatment depends on whether tax was already deducted under Sections 236M or 236N.
❓ How is tax calculated on futures trading?
Tax is calculated based on entry and exit dates of futures contracts and applicable capital gains rules.
❓ What happens if I inherit shares?
The market price paid by the deceased becomes the acquisition cost for tax purposes.
Final Takeaway
FBR’s updated clarification under Rule 13L brings greater clarity, transparency, and consistency to stock market taxation in Pakistan. Investors are strongly advised to maintain proper records of acquisition, disposal dates, and transaction prices to stay compliant and avoid unnecessary tax complications.
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. While every effort has been made to ensure accuracy based on official sources, readers are advised to consult qualified tax professionals or official FBR guidelines before making any investment or tax-related decisions. The publisher shall not be held liable for any losses, penalties, or consequences arising from reliance on this information.