Trading options and taxes
Go to question 4 2. Go to question 3 No: See answer 1 3. Go to question 5 No: See answer 4 4. See answer 2 5.
Go to question 6 No: See answer 5 6. See answer 5 No: See answer 3 Answer 1 You disregard any capital gain or loss you make on the sale or expiry of the rights or options. Answer 2 If the capital proceeds on the sale or expiry of the rights or options are more than their cost base, you make a capital gain.
This change is significant, as it may indicate a move from viewing binaries as gambling, into more mainstream financial income. For the current tax year, the advice below remains accurate. HMRC looks at all relevant circumstances to make decisions on tax liability. However, it is important to note that the correct treatment of any financial transaction or investment comes down to a question of fact:.
A transaction with a spread betting firm is a good example of this contextual approach; i. For most individuals, HMRC is likely to consider this activity as betting, which means any profits made from it will be outside the scope of both Income Tax and Capital Gains Tax. However, if that same transaction is carried out for commercial purposes; for instance, if it is made strategically as a hedge to offset the risks attached to direct investment in a security , any profits that arises from it might be regarded as part of a wider pattern of activity attracting tax liability.
For more information on this, see guidance note BIM The consequence of purely speculative, gambling or betting activity is that profitable transactions from it do not generally attract a tax charge. However, the potential downside of this from your point of view is that you cannot claim tax relief on losses from this type of activity. 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 applies even if the proceeds were taxed in a previous year, and no T1Adj was filed to reverse this. Therefore, double taxation will occur if the T1Adj is not filed. During the year you sell 3 Put options of the same underlying and they expire out of the money.