Even as an unofficial trading instrument, binary options are taxable. The laws vary according to your country of residence and while some countries do not require traders to officially declare profits from trading options, many others, such as Canada, dictate that all profits must be properly filled on an income tax report.
Doing taxes is the time of year most people dread. Whether you are compiling all of your paperwork and heading over to an accountant or you use software to do it yourself, the intricacies of the system can get overwhelming very quickly. For people with straightforward accounts (e.g. no investments), the process is streamline for the most part, but for binary options traders, things can get a bit dicey given that the industry has yet to be regulated in Canada, making it difficult to access the right information via formal channels.
As a Canadian trader, you are obligated by law to file a tax return, no matter how you get your total income and where it comes from. Since no binary options broker withholds some of your profits for tax purposes – this would be impossible given how traders come from so many different countries– you are solely responsible for declaring taxes on your earnings. Generally, all binary options profits are taxed as capital gains.
The first element to make note of in regards to binary options tax is all gains made from options have to be reported in the tax year within which the options expired. For example, if one of your trades started at the end of December one year and expired ‘in the money’ at the beginning of January, you would include the profits from that trade on your taxes for that new year.
As soon as you begin trading, it is crucial that you figure out a way of keeping track of all of your transactions. Every deposit, every withdrawal, and all of your trade details, regardless of if they finish ‘in the money’ or ‘out of the money’ should be recorded. This may sound very tedious but once you find the right setup for your trading circumstances, it will become second nature to update your worksheet on a regular basis. You will be thankful to have done this when tax season arrives. The easiest and most straightforward way to do this is by using a spreadsheet where you can use formula to automatically calculate the total amount of your profits and losses. When you get ready to do your taxes, all you will have to do is refer to your document for the amounts to include on your return.
One aspect that tends to be forgotten with taxes on binary options in Canada is that you are allowed to use all expenses related to your trading activities and claim them as deductions. However, in order to do this properly and have it accepted by the Canadian Revenue Agency (CRA), you must have all receipts of items you declare on your tax return and you must also be able to justify how each purchase was strictly related to trading activities. This can include anything from the purchase of trading material to a computer.
As long as you are well organized and have strong record keeping skills, filing Canada tax on binary options should be a breeze. We advise you to consult with a knowledgeable accountant for additional guidance.