How to Report Stock Options on Your Tax Return
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Ads keep this website free for you. 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 taxes on options puts and calls 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 Archivedparagraph 25 cCRA 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 incomethe 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, taxes on options puts and calls cost of the options is added to the cost base taxes on options puts and calls 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 lossesthe 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 taxes on options puts and calls 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 taxes on options puts and calls 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 taxes on options puts and calls sale of shares call optionor 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. Based on the above table, each transaction should be treated as capital gain in the year sold. What if on the 4th option sold of the same underlying, you end taxes on options puts and calls with the underlying shares? Clearly you reduce the cost of the shares assigned by the value of the premium received on the 4th sale.
BUT can you further reduce the cost of the shares by including the first 3 premiums collected if the shares are sold in the same year? Each sale of put options is a separate transaction, and not related to the next sale of put options.