Last updated November 23, 2020.
Reporting online day trading income?
A growing number of Canadians manage their own retirement portfolio and trade online every day.
When you sell a security and make a profit, you realize a capital gain. For most Canadians, the taxable capital gain is determined by multiplying the capital gain amount (profit) with the year’s inclusion rate.
If you’re a day trader that makes a living buying and selling equities, the way you calculate taxes can be a lot more confusing. Do you report transactions as business income instead of capital gains or losses?
It will make a big impact on your taxes. Not knowing how to report your day trading earnings or losses could also result in an audit by the Canada Revenue Agency (CRA).
Are You a Day Trader or Investor?
First, you need to determine if you’re a day trader or investor. It all comes down to how often you trade, how long you hold the equities, and the amount of time you spend trading.
If you buy and sell equities as an investment, you’re an investor and should report any profits or losses on a capital account.
If, on the other hand, you day trade like a securities dealer and buy and sell on a daily basis with the aim of making a short-term profit on small price fluctuations, any gains should be reported as business income.
Investor Income and Losses
Determining whether you’re a day trader or investor will have a big impact on how much you pay in taxes.
If you’re an investor (infrequent trades with long-term investing horizon), you’ll treat any profits as a capital gain. This means 50% of your gains are taxed at your marginal tax rate.
A capital loss can only be used to reduce or eliminate capital gains. On top of that, trading fees are not tax deductible.
Despite the obvious advantage to declaring capital gains as a non-professional trader, there are some drawbacks.
In particular, the “superficial loss rule,” or the “30-day rule.” If an investor, spouse, or company they control buys back an asset, or similar asset, within 30 days of selling it, they cannot claim the capital loss for tax purposes.
This rule ends up costing investors a lot in taxes each year.
Business Income and Losses
For day traders, any profits and losses are treated as business income, not capital.
As a result, you can’t use the 50% capital gains rate on any profits. Instead, 100% of all profits are taxed at your current tax rate.
At the same time, 100% of any losses are deductible too; that can be applied to other sources of income as well.
For example, if you report an annual trading loss of $15,000 this year and you also run a business, you can deduct your trading losses against other sources of income. This includes money made from your other business, which can significantly reduce the amount you pay in taxes.
If you’re a full-time day trader, you can also claim expenses related to your trading.
Just like with any other business, you need to have receipts for all the items you declare on your tax returns.
The CRA will not accept these kinds of deductions without receipts.
Deductions can include anything from taking stock market trading courses, to educational resources, the purchase of a computer, and your monthly internet bill.
Learn how to choose the right accounting solution for your small business
When we speak to day traders like you, they tell us that doing the actual work is the easy part of running a business. It’s staying on top of tax obligations—record keeping, figuring out which tax deductions apply to them, tax filing—that’s the hard part.
Most day traders don’t have the time or technical knowledge to handle all the admin on their own. They’re also afraid of making a mistake—they don’t want the CRA to come calling.
Sound familiar? You have enough on your plate just keeping up with the day-to-day of your business. That's why you hired an accounting and tax provider. Or are thinking of hiring one. But how do you find the right fit?
Find the answer in our free e-book: 5 essential questions to ask when choosing when choosing a tax provider.
FBC, Helping Canadians Reduce Their Tax Burden
Since 1952, FBC has been working exclusively with self-employed contractors and small business owners. For almost 70 years, we've helped tens of thousands of clients from across the country with their unique tax preparation, business planning, bookkeeping and financial planning needs.
Interested in learning more? Please call us at 1-800-265-1002 or email [email protected] We're also offering a free consultation to explain how you can make sure you’re taking advantage of all the tax-saving opportunities available to you.