Income tax options trading
Looking for US tax information? Look in our Directory. Stay Connected with TaxTips. However, if you are in the business of buying and selling stock, then your gains and losses from options will be treated as income on income account - see capital or income.
When your options are treated as capital gains, their disposition is reported on Schedule 3 Part 3, where publicly traded shares are reported. Gains or losses realized by a writer seller of naked uncovered options are normally treated as income. However, according to ITR Transactions in Securities Archived , paragraph 25 c , CRA will allow these to be treated as capital gains, provided this practice is followed consistently from year to year.
For taxpayers who record gains and losses from options as income , the income from options sold written is reported in the tax year in which the options expire, or are exercised or bought back. When call options are purchased and subsequently exercised, the cost of the options is added to the cost base of the purchased shares.
If the call options are not exercised, the cost is deducted in the tax year in which the options expire. If the call options are closed out by selling them, the proceeds are included in income, and the original cost is written off, in the tax year in which the options are closed out.
When put options are purchased, the cost is written off in the year in which the options expire, are exercised, or are closed out by selling them. For taxpayers who record gains and losses from options as capital gains or losses , the timing is a little trickier for options which have been sold. The following table shows the timing of the recording of gains and losses on options that have been sold or purchased. Event Timing of proceeds reported for tax purposes Tax treatment when options are sold: To revise the capital gains from the previous year, a T1Adj would have to be filed.
See our article on changing your tax return after it has been filed. Of course, if the prior year tax return has not been filed when the options are exercised, the prior year return can be done omitting the gain, eliminating the need for a later revision. Usually, the taxpayer would benefit from filing the T1Adj.
The only problem is that the Income Tax Act requires the options proceeds to either be added to the proceeds from the sale of shares call option , or deducted from the cost basis of shares purchased put option when the option is exercised. This stipulates that if an investor, a spouse, or a company they control buys back an asset or similar asset within days of selling it, they cannot claim the capital loss for tax purposes.
This rule trips up many traders each year, costing a considerable amount in taxes. For further clarification and other Canadian rules on taxes to be aware of, see our rules page. As a day trader, you look to close out any positions by the end of the trading day. You are concerned with making profits on small price movements across a high number of trades. Because your primary motivation is to generate profit, you must report your earnings as business income.
This income is then fully taxable at your marginal rate. However, you also have a graphic design business. You can offset your trading losses against the revenue generated from your graphic design business. Hence, significantly reducing your total tax liability.
Claiming Expenses — You can also claim expenses related to your trading activities. In order to claim any day trader tax deductions in Canada though, you must have receipts for all the items declared on your return.
The Canada Revenue Agency CRA will not accept these deductions without receipts, and you must also be able to justify how each purchase was related to trading activities. Once you have supporting evidence, you can include anything from educational resources to the purchase of a computer and your monthly internet bill.
However, let me stop you there. You do not get much of a choice in the matter. With the rise in cryptocurrency markets and the complex nature of some instruments, many traders rightly question whether you face different tax obligations in certain markets.
Will currency and stock trading taxes in Canada be the same as futures and options trading taxes, for example? On the whole, the CRA is concerned more with how and why you are trading, than what it is you are buying and selling. Therefore, futures tax reporting will face the same procedure and implications as a tax return on ETFs. Binary options trading tax treatment in Canada takes you into murky waters.
The main thing to note is all gains from your options must be reported within the tax year the options expired. To make options trading tax reporting stress-free when December rolls around, you need a detailed spreadsheet with all your trades in. The benefit of a spreadsheet is that it can automatically calculate your total profit and loss. You can then swiftly refer to your spreadsheet to find the amounts to include on your returns.
As the binary options industry is yet to be regulated properly in Canada, keeping a close record of previous activity is essential. This lack of regulation can make getting information via formal channels a complex procedure. If changes to taxes are introduced it could mean greater profits are left in your pocket at the end of the trading day.
Canadian tax laws on currency trading are another topic of interest. The bulletin laid out an important point to bear in mind when filing a tax return on forex income in Canada:.
If, on the other hand, it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of capital assets, this gain or loss is either a capital gain or capital loss, as the case may be. It was also pointed out that the nature of the foreign exchange gain or loss, is not affected by the length of time between the date the property is acquired or disposed of and the date upon which payment or receipt is effected.
So, the forex day trading tax implications in Canada are to a certain extent controllable by you. However, the CRA has pointed out that forex tax reporting must be consistent. So, if you file your profits as business income at the beginning, you cannot later change it to capital gains simply to reap tax benefits. Most people dread the time-consuming hours where you compile all your paperwork to set about filing your tax return.