The taxation of the options occurs when the option is sold or expires. In your second example, the gain or loss would be realized for tax purposes in 2000, when sold. If the option expires and is not sole, there is deemed proceeds of $0 and a loss equal to your cost is realized. For most people, the gain or loss on the sale of options will be treated as a capital transaction with a resulting capital gain or capital loss. If a capital loss is realized, it can only be applied to reduce taxable income as against other capital gains. If you trade options on a regular basis (and particularly short term options versus leaps for example), you may be regarded as a trader and in effect carrying on a business. If that is the case, you profit will be taxed as business income and the full amount of the profit will be included in your income in the year. However, if the option trading is a business and if losses are realized, they can be deducted as against other sources of income (unlike capital losses which are restricted in their use, as mentioned above). In addition, where you are buyer and selling options on a regular basis and want the resulting income to be treated as capital gains rather than business income, there is an election which you may file with Revenue Canada, which will result in capital gains treatment of future sales. However, there are exceptions where this election can't be made if you are a 'trader or a dealer in securities' so if you are trading full time, probably this election is not available. I have tried to keep the response short but if you are trading options, you should consider your tax strategy carefully and probably with your tax adviser. If you are successful, capital gains treatment is very nice as only 75% of the gain is subject to tax but if you lose and eventually quit trading, obtaining a business loss which reduces other income can reduce the net loss that you incur. Don't mean to be negative, but options can eat you up and if so, you want to try to minimize your losses. Hope this helps.
TommyD |
