Investing

Tax on Day Trading - Options Seller

  • Last Updated:
  • Jan 17th, 2021 2:26 am
[OP]
Newbie
Dec 1, 2010
34 posts
39 upvotes

Tax on Day Trading - Options Seller

I've been making consistent income every week since last year on premiums received from selling US options. Due to COVID-19 I haven't been employed for a few months now. At the same time, I've been increasing my capital to sell US options to the point where the income is higher than my previous job now. I'm not sure if I'll do this full time forever, but I should start considering the tax consequences right now and tax planning for the future.

My background is in accounting, but don't specialize in taxes. I've asked my tax friends who work in firms but none of them are familiar with day trading. I've looked up RFD and other sites for answers, but would be nice if anyone has relevant experiences.

If anyone has input for any of my questions below, that'd be greatly appreciated.

1) I assume I'll have to report these as business income now instead of capital gains given I'm basically doing this full time now and making 20 or so trades every week?

2) During the year I liquidated some stocks that I've held for a few years, would I be able to claim those as capital gains instead?

3) The income is going to create a huge tax bill. If my taxes owing exceeds $3k will I be forced to pay tax instalments the year after? Can I just pay a large sum before year-end to avoid this?

4) A little late but I assumed I'm not eligible for CERB given I have substantial income still?

5) Would incorporating (in the future) ever make sense if I exceed 100k income a year? I've read some people have done so, but I also thought the small business deduction won't apply for investments with no employees in a CCPC and therefore would not make it tax advantageous when also considering the incorporation and tax filing costs.

6) Know any tax/legal professionals who are familiar with day trading? Not that I think I'll need it yet but good to know for the future
4 replies
Deal Fanatic
Jun 27, 2007
5507 posts
1956 upvotes
1. it's not black and white. If you're unemployed due to COVID and receiving CERB, I think you can still claim cap gain. This is because selling premium is not directional and does qualify as cap gain/loss. When selling, you don't control any assets/underlying. But if there is no other income, yep, they might say it's business income - you need money to support yourself, and not receiving CERB means you have other sources

2. stock held for years is definitely cap gain

3. Over 3K and yes, next tax year (2022) they might ask for installments.

4. Options expire, so you must act to roll/close. It's not considered day trading if done occasionally. IMO, you would still qualify for cerb as long as you don't withdraw the funds from your account. But this is not 100%, ask accountant.

5. Small business deduction will not apply, tax rate will be 40-45%, I think. Some people still claim as very few folks at CRA even know this.
With corp, you must specify corp's area of business and main activity. You can be creative, and assessments/flags always raised over what the business activity is vs peers. I don't think there is manpower to go into details of each canadian corp to see what it actually does.

BUT, what you said (cannot deduct SBD) is the tax law, up to you what you do.
Last edited by dlhunter on Jul 29th, 2020 11:22 am, edited 1 time in total.
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Sr. Member
Aug 31, 2001
582 posts
59 upvotes
I've been looking to this myself as I have started selling options as well and have been asking around.

This is the reference I have so far.

ACB tracking is relevant if you get assigned and own the stock.

I would also like to find a tax/legal/accounting professional who could deal with all this.

https://www.taxtips.ca/personaltax/inve ... ptions.htm
[OP]
Newbie
Dec 1, 2010
34 posts
39 upvotes
dlhunter wrote: 1. it's not black and white. If you're unemployed due to COVID and receiving CERB, I think you can still claim cap gain. This is because selling premium is not directional and does qualify as cap gain/loss. When selling, you don't control any assets/underlying. But if there is no other income, yep, they might say it's business income - you need money to support yourself, and not receiving CERB means you have other sources

2. stock held for years is definitely cap gain

3. Over 3K and yes, next tax year (2022) they might ask for installments.

4. Options expire, so you must act to roll/close. It's not considered day trading if done occasionally. IMO, you would still qualify for cerb as long as you don't withdraw the funds from your account. But this is not 100%, ask accountant.

5. Small business deduction will not apply, tax rate will be 40-45%, I think. Some people still claim as very few folks at CRA even know this.
With corp, you must specify corp's area of business and main activity. You can be creative, and assessments/flags always raised over what the business activity is vs peers. I don't think there is manpower to go into details of each canadian corp to see what it actually does.

BUT, what you said (cannot deduct SBD) is the tax law, up to you what you do.
That was helpful, thanks a lot!
Sr. Member
Aug 31, 2001
582 posts
59 upvotes
^ Bump on revisiting this topic with OP and people with experience due to tax season.

I have been selling premiums as well in 2020 on the side making a fair number of transactions selling option and closing them / rolling them (afaik , closing/rolling them concludes the trade as it is buying back the option).
On top of that a few long option trades.

1) Any recommendations on accountants to help with tax filing and tax-related advice associated with investments, optimization as per above?
2) Any insight how option sell/ buy activity would be taxed with the consideration of criteria such as : frequency, amount of net p/l, whether it is full-time or not (for me it's not my main source of gains)?
3) SBD - saw in the other thread regarding potential for 15% tax rate - but this sounds like grey area as per @dllhunter and would be best to consult tax / accountant professional.

Appreciate any directions. thank you.

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