Trading shares online should not expose you to any tax you wouldn't encounter offline. But in the whirl that the speed and flexibility of internet dealing give you, it is easy to let your documentation and records get out of hand. There are three basic taxes to bear in mind when dealing shares: stamp duty; capital gains tax; and income tax. CGT, especially, can be fiddly, though in some ways online trading can ease the burden of calculating your liabilities.

Stamp duty

This is the easiest of the taxes to deal with because it requires no record-keeping or form-filling. You simply pay it with your commissions when you buy shares. Stamp duty is levied when ownership of an asset changes - it is payable on investments from property to shares, though at different rates.

Buying shares in companies that are registered in the UK incurs stamp duty at 0.5 per cent. Sales of UK shares or purchases and sales of foreign shares are not liable for UK stamp duty. Analysts reckon the average UK investor pays £5,000 in stamp duty over ten years of investing.

Since stamp duty is a tax on transactions, the more you trade, the more you pay. It is one of the reasons why day trading hasn't really taken off. In the US, where transaction tax is only 0.003 per cent, day trading is big business.

Stamp duty dates back 300 years. Essentially a tax on documents, many question whether its principles are suited to the modern world of electronic commerce. Abolition has been mooted for a decade or more. Private investor groups, brokers and the stock market itself have been campaigning for years for its removal. Their latest hope is that the proposed merger of the London and Frankfurt exchanges - to create iX, with smaller high growth shares listed in Frankfurt and all larger ones in London - will make the present stamp duty rules unworkable.

Capital Gains Tax

You might dislike stamp duty, but at least it is easy. CGT is definitely not. One of the reasons is that the rules keep changing - but not retrospectively.

That means if you have held an asset for about three years or more, you could have three different calculations to do before you can work out the rate of CGT you pay and the amount you must pay it on.

CGT, in basic principle, is straightforward enough. It is a tax on the gains you make from investing capital. In this tax year, you are allowed to make £7,200 of gains before you become liable for CGT. After that, you will pay the tax at a maximum equivalent to your normal "marginal" rate. In other words, if you are a higher rate taxpayer you will pay at up to 40 per cent; if you are a basic rate taxpayer, you will pay at up to 22 per cent.

The "at up to" bit is where the complication sets in, but the sums are worth doing because they will probably reduce your tax bill.

Before April 1998, a system known as indexation applied to your assets. This essentially brought inflation into the equation, to ensure you weren't merely being taxed on inflation-induced capital gains.

From April 1998, the taper relief system began to operate - so-called because the effective rate of CGT tapers from 40 per cent (as a higher-rate taxpayer) if you sell after holding the asset for only one year (from 1998) to 24 per cent after holding it for 10 years. This, the government argued, was more suitable for today's low-inflation environment. Your gains would be offset not by the rate of inflation but by how long you had held the assets.

In the last budget, Gordon Brown, the chancellor, added another twist - again of benefit to most investors, but adding another layer of complication to the calculations. He declared that a business taper of four years would apply not only to business assets but to certain personal assets. Now, if you own shares in the company you work for (either through a company-run scheme, or off your own bat), you qualify for the four-year taper. Investments in all Alternative Investment Market (Aim) shares qualify for the business taper, too. The same is true if you own more than 5 per cent of any listed company.

The business taper is more dramatic than the private investor taper, too - it cuts a rate of 40 per cent to 10 per cent after four years.

But the new rules only apply from April 2000. If, say, you bought shares in your own company in 1996, and sold them next year, you would have to apply the indexation multiple for the period to April 1998, then a personal assets taper to April 2000, then a business assets taper. Before you start worrying about taper relief, though, you must come up with the overall figure for the capital you have gained. Then you must apportion it evenly to each of the above periods (it doesn't matter if the shares did all their growing between 1996 and 1997). Details of indexation multiples and tapers are available on the Inland Revenue website. If in doubt about how to calculate your bill, the Revenue may be able to help. Otherwise, you may have to use an accountant.

Remember you will need to keep share contract notes proving when you bought and sold shares. If the Revenue investigates your tax return, you will be asked to produce them.

Income tax

Income tax is almost light relief after the rigours of CGT but it is still more intricate than it might be. Income from share investments comes in the form of dividends. A complex system of pre-paid tax and tax credits applies to the dividend payment you receive. But boiled down, it means that if you are a basic rate taxpayer, you will probably have no more tax to pay (unless your dividend income pushes you into the higher rate band), but if you are a higher rate taxpayer there will be more to pay. Dividend income needs to be declared on your tax return, whether there is extra tax to pay or not.

Isas

Individual savings accounts (Isas) are a tax-free way to invest in stocks and shares. Everyone over the age of 18 has an annual entitlement (this year's maximum is £7,000) which can be invested in cash, life insurance and/or stocks and shares.

There are "mini" and "maxi" Isas, and there are a number of possible combinations. For anyone who wants to buy equities, you can invest up to £3,000 in a mini, or £7,000 in a maxi. If, for example, you buy a mini cash Isa, that precludes you from buying a maxi stocks and shares Isa. A serious investor should probably spurn the cash Isa allowance (of £3,000) and take up the full £7,000.

Isas protect your investment from all CGT liabilities and cut the effective rate of tax payable on dividend income. Rather than paying 10 per cent as a lower or standard rate taxpayer, or 32.5 per cent as a higher rate taxpayer, you get a 10 per cent tax credit. From 2004, however, tax credits will cease to be payable on dividends paid on Isa-held shares. The net effect is that at the moment you get more out of a dividend in an Isa but in four years' time you will get the same dividend whether you hold a share in an Isa or not.

Online stockbrokers normally sell only self-select Isas - a subset of the stocks and shares Isa - which involve buying individual shares (in an Isa wrapper) rather than the more normal fund Isas which invest in unit trusts or investment trusts.

A few brokers do sell fund Isas. Self-select Isas can accommodate as many stocks as you like and can be chopped and changed at will. Brokers normally charge an annual management fee as well as transaction commission on the stocks in a self-select Isa.

Tax implications of buying foreign shares

Going online can give you cheap access to foreign shares via foreign brokers. (Most UK brokers remain fairly parochial.) Choosing foreign shares in preference to UK ones will save you UK stamp duty, and if you focus on, say, the German market, there will be no stamp duty to pay locally either.