My main income is trading, Benefits for Active Traders Who Incorporate
Money Matters How should I report my online trading income? How should I report my online trading income? If investing is starting to become more lucrative than your full-time gig, you might be opting to work from home and have turn it into your new occupation.
If this is the case, things can get confusing when tax time rolls around. You might be wondering if you should be reporting your securities transactions as business income, instead of capital gains or losses? If you go down that road, you could also be weighing how likely is it that the method of reporting you choose could be challenged by the Canada Revenue Agency CRA.
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- Comment Synopsis Since you have income from stock trading, you will need to use ITR-2 to file your tax return.
Whatever method you choose will have a big impact on your taxes. Business losses, on the other hand, are fully deductible against other sources of income. Business profits are pensionable for CPP purposes, meaning they might be subject to CPP contributions at the self-employed rate of 9.
For example, day-traders, who make all their trading transactions within the same day, should report transactions as business income.
How to decide? Determine your pattern of trading. Factors that determine a trading pattern include the frequency of your transactions, the duration of your holdings, your knowledge and experience of the stock market, and the amount time you spend on the activity.
The type of securities you buy is also important. On the other hand, a single transaction could be considered an adventure in the nature of trade, and therefore business income, especially if it was purely speculative and made in hopes of a quick profit.
How likely is it that my method of reporting will be challenged? An informal survey of Tax Court of Canada looked at cases after the yearand discovered 10 cases that had security transactions in dispute.
Eight of these involved taxpayers my main income is trading had been challenged by the My main income is trading when they claimed their losses as business losses.
So, if we look at the number of times that an issue is reviewed by Tax Court as a reflection of how the CRA assesses trading income, it seems like claiming losses from securities transactions as business losses attracts more attention than reporting profits as capital gains. You can use this to guarantee that the disposition of all Canadian but not foreign securities be treated as capital gains or losses. To make this election, track down and fill out Form T Election on disposition of Canadian securities.
What else should I know before I decide?
When taking a look through your trades, remember that the CRA always considers the gain or loss on the sale of short sales to be business income unless you made the transaction to hedge your position with respect to identical shares held on capital account. Online trading is a great way to build up your investment portfolio and generate some extra income, just remember that anything you earn or lose in a year needs to be reported, so make sure you are using the appropriate method.
Have more questions about declaring your online trading income on your return? Ready to file?