T his is the final article in my series on stock options. The previous articles provided background on what stock options are and how stock options are used. In this article, I address the tax consequences of using stock options. The first step in figuring out how stock options are taxed is to determine whether your gains or losses are capital gains and losses or business gains and losses.
For more information on capital gains, see Capital Gain or Income? If you have purchased or hold a call option, you have acquired the right to buy a stock at the stated price on or before the option expires. If you have purchased a put option, you are acquiring the right to sell a stock at a stated price on or before it expires.
The seller of a call option has an obligation to sell or deliver shares of a stock at a stated price on or before the option expires. If you are selling or writing a call option, you believe the price of the stock will not change or will decrease so that you can earn a premium.
Covered Call — If you own the share and the price increases and the option is exercised then you must deliver your shares to the other party. Naked Call Option — If you do not own the shares and the option is exercised you will have to purchase the shares on the stock market to deliver.
If you are looking for more information on the types of investments available and how they work, take a look at the Investor Education Fund. Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Just wanted to clarify one thing. For covered call writing, why are gains and losses typically considered income? Under what conditions, if any, are they considered capital gains?
I can see how options would not qualify as capital gains because of their short periods of ownership, but is this criterion not applicable for options since they have an expiry date? The writer of Naked non-covered is normally income. The asterix note had text missing when the article was uploaded. Suppose I sell a covered call option in and buy to close in I assume the premium is considered a capital gain in But is the price paid to close the position a capital loss for , or would I need to amend my tax return to reduce capital gains?
J — Assuming you normally trade on the capital account, the premium received in would be a capital gain. You would only amend your return if the option were exercised in If you acquire an offsetting option in , the cost would be a capital loss in Considering you are treating all premiums received as Income, I found out that you should use form If for the year in question there is a net loss, what Part should we use to deduct income given the net loss from option writing.
Thanks in advance tax guy. I have not had to complete forms for options trading on the income account. However, if you normally treat your gains and losses as capital gains and losses but have options that require you to report your gains as income, you can report them as other income on Schedule 4.
If you are considered in the business of trading then you can use the Business income form T I normally treat my gains and losses as capital gains, but this year I wrote and bought back some naked puts as well. I sometimes made a profit, and sometimes made a loss, but eventually ended up with a total income loss considering only those naked puts. How should this information be entered within Schedule 4?
I would be inclined to report your gross gains as income on and your gross losses on and attach a letter to your return outlining how you have filed. I would suggest that you should probably hire someone to do your taxes. You will have a reasonable assurance it was done correctly and you will have recourse if not. The information in this site is general information only and should not be considered tax advice.
These are similar questions as Marin but I am asking about short put. Or should I amend tax return for both cases? On the one hand you say you are receiving the premium which suggests you are writing the put on the other you are paying out.
Or this is amend tax return? Writing a put means you are assuming an obligation to buy the underlying security in return for a premium. How Are Stock Options Used? The information on Canadian Tax Resource should not be taken as professional advice. Each person's situation differs, and a professional advisor can assist you in using the information on Canadian Tax Resource to your best advantage. Read more on my about page. Canadian Tax Resource Blog.
About The Tax Guy Bits The writer of Naked non-covered is normally income. What do you think? Thanks for any pointers…. Using the property terminology, please advise whether you are buying a put or writing a put. You have said you normally trade on the capital account.
The premium received is a capital gain at the time the option is written. If you acquire another option to close out the position, this is a capital loss. Subscribe to Free Updates. About The information on Canadian Tax Resource should not be taken as professional advice. The costs of the option plus brokerage fees is added to the adjusted cost base of the shares. The costs of the option plus brokerage fees are added to the cost of the shares.
The cost of the option plus brokerage fees become a capital loss in the year the option expires. The cost of the option plus brokerage fees is deducted from income in the year the option expires. The adjusted cost base of the option is deducted from the selling price less brokerage fees generate a capital gain or loss. The cost of the put plus the brokerage fees is deducted from the proceeds from the sale of the shares. The premium less brokerage fees is a capital gain when written and an offsetting position would be deducted from the capital gain.
The premium is income and the cost of the offsetting position is a deduction.More...