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    gnrocks
    Level 2

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

     
    posted
    ‎February 3, 2020 9:03 AM
    last updated ‎February 03, 2020 9:03 AM
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    TurboTaxAllen
    Level 5
    Level 5

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

    Hello,

    There are two considerations to discuss, the tax treatment of a Gain or Loss on the sale of a traded stock, and what constitutes day trading as a business. Ultimately, we cannot make that decision for you in how you make your declaration of income or claim expenses, but we can provide you information and resources to aid you in making that determination.

     

    The tax treatment of a gain or loss on the sale of an asset, including a traded stock, is addressed extensively by the CRA and courts. In general, any asset that is acquired and sold would be considered for income tax purposes a Capital Gain or Capital Loss, not as income or an income loss. The tax treatment has as much to do with the intent of the purchase and trade, as it does with the facts of the transactions, for example if you are in the business of buying and selling stocks.  Some transactions, such as ‘short sales’ are considered income or income loss and not a capital gain or capital loss.  For non-professional traders there is an ‘Election to Treat Transitions as Capital Transactions' Form T123 that will allow what otherwise would be an income or loss to be a capital gain or capital loss, such as short sale.  There are other rules such as ‘Superficial Loss’ which restrict capital losses in specific circumstances. You will find the T4037 Capital Gains Guide reference link below.

     

    What constitutes Day Trading or professional trading as a business rather than a hobby or modest supplement to your income has several considerations apart from how long the asset is held including but not limited to the amount of time spent on the activity, the level of knowledge or expertise in the endeavor, and the amount of income derived from the activity. When trading transactions occur as a business, the Gain or Loss are recorded as income gains or income losses.  Additionally, the business may incur expenses apart from the limited investment expenses in conducting their business, such as the capital in computer equipment, or the expense of trading publications and a home office. To aid you in making your self-determination please review IT-479r Transactions in Securities, especially paragraph 11.

     

    Please note, a professional stock traders can incur a capital gain or capital loss on certain transactions, for example having a separate trading account holding dividend paying or long term investments.

     

    If you make the determination that you are a Day Trader as a business, you may consider acquiring the Self-Employed for TurboTax Online to aid you in completing your tax return. Non-Capital Losses, where your business loss exceeds your other income in that year, have a particular tax treatment that is addressed in CRA publications including the T4002 Business Income Guide, see the reference below.

     

    For your reference:

    View solution in original post

    ‎February 26, 2020 1:02 PM
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    5 Replies
    TurboTaxAllen
    Level 5
    Level 5

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

    Hello,

    There are two considerations to discuss, the tax treatment of a Gain or Loss on the sale of a traded stock, and what constitutes day trading as a business. Ultimately, we cannot make that decision for you in how you make your declaration of income or claim expenses, but we can provide you information and resources to aid you in making that determination.

     

    The tax treatment of a gain or loss on the sale of an asset, including a traded stock, is addressed extensively by the CRA and courts. In general, any asset that is acquired and sold would be considered for income tax purposes a Capital Gain or Capital Loss, not as income or an income loss. The tax treatment has as much to do with the intent of the purchase and trade, as it does with the facts of the transactions, for example if you are in the business of buying and selling stocks.  Some transactions, such as ‘short sales’ are considered income or income loss and not a capital gain or capital loss.  For non-professional traders there is an ‘Election to Treat Transitions as Capital Transactions' Form T123 that will allow what otherwise would be an income or loss to be a capital gain or capital loss, such as short sale.  There are other rules such as ‘Superficial Loss’ which restrict capital losses in specific circumstances. You will find the T4037 Capital Gains Guide reference link below.

     

    What constitutes Day Trading or professional trading as a business rather than a hobby or modest supplement to your income has several considerations apart from how long the asset is held including but not limited to the amount of time spent on the activity, the level of knowledge or expertise in the endeavor, and the amount of income derived from the activity. When trading transactions occur as a business, the Gain or Loss are recorded as income gains or income losses.  Additionally, the business may incur expenses apart from the limited investment expenses in conducting their business, such as the capital in computer equipment, or the expense of trading publications and a home office. To aid you in making your self-determination please review IT-479r Transactions in Securities, especially paragraph 11.

     

    Please note, a professional stock traders can incur a capital gain or capital loss on certain transactions, for example having a separate trading account holding dividend paying or long term investments.

     

    If you make the determination that you are a Day Trader as a business, you may consider acquiring the Self-Employed for TurboTax Online to aid you in completing your tax return. Non-Capital Losses, where your business loss exceeds your other income in that year, have a particular tax treatment that is addressed in CRA publications including the T4002 Business Income Guide, see the reference below.

     

    For your reference:

    ‎February 26, 2020 1:02 PM
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    brad1028
    Level 1

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

    Hello,

    The links you provided show how to report Capital Gains.  The question is clearly, how do we report day trading 'Business' losses?

    ‎March 28, 2023 8:44 PM
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    TurboTaxAllen
    Level 5
    Level 5

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

    Hello Brad,

     

    Before I answer how to report stock transactions in an investment business for income tax purposes, I would reiterate my earlier statement as whether an individual has an investment business as many people confuse the activity "Day Trading" as a license to consider themselves a business, when the facts may not support that determination.

     

    "What constitutes Day Trading or professional trading as a business rather than a hobby or modest supplement to your income has several considerations apart from how long the asset is held including but not limited to the amount of time spent on the activity, the level of knowledge or expertise in the endeavor, and the amount of income derived from the activity. When trading transactions occur as a business, the Gain or Loss are recorded as income gains or income losses.  Additionally, the business may incur expenses apart from the limited investment expenses in conducting their business, such as the capital in computer equipment, or the expense of trading publications and a home office. To aid you in making your self-determination please review IT-479r Transactions in Securities, especially paragraph 11."  

     

    In reply to how to report those stock trading transactions for income tax purposes, as anyone will note you cannot report negative income for "Gross Sales, Commissions or Fees...", that is because you are "Trading".  Consider the financial asset as you would any other capital asset being bought and sold as a business, which is reported in the Cost of Goods Sold section of the T2125, as well as for your records in bookkeeping.  There would be an Opening Inventory, Purchases, Direct Wages costs, Subcontracts, and Other Costs, all of which sums to an overall Cost of Goods. Next you determine the value of your Closing Inventory.  The difference from your Cost of Goods and your Closing Inventory determine if you had a Profit or Loss in your trading. For reference, please review “Part 3D – Cost of goods sold and gross profit” in the guide T2125 “Self-employed Business, Professional, Commission, Farming, and Fishing Income: Chapter 2 – Income”.  See: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002/t4002-4.html#...

     

    Note, there are special considerations and treatment for assets ("stocks") being brought into the business as opening inventory.  Additionally, I would like to re-emphasize the importance treating this endeavor as any other business trading in goods, where you would maintain accurate records and bookkeeping of all transactions, as well as a log of your time allocated to this business activity. Should you receive a Supplemental Review request or an Audit from the CRA to substantiate your declarations, including claims of a loss, these records would be essential in  your reply.

     

    Intuit offers many value added services including QuickBooks On-Line to better manage your business reporting and records, as well as TurboTax Online and Live for your income tax reporting.  

     

    ‎March 29, 2023 8:17 AM
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    brad1028
    Level 1

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

    Thank you for the additional information.  Assuming we have properly evaluated our activities as 'day trading', how do we access the T2125 to enter the COGS, and Closing inventory.  I am currently using the 2022 Self Employed version and cannot seem to access the T2125 form.

    ‎March 29, 2023 8:34 AM
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    TurboTaxAllen
    Level 5
    Level 5

    I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

    Hello Brad,

     

    Both TurboTax Online ("TTO") as well as TurboTax Desktop ("TTD") offer an interview method in creating your tax profile.  After creating your tax profile the software guides you in making your entries.  After completing your profile you can still access the information with the left side menu under 'Income' > 'Self-Employment' < 'Self-Employment Intro', and in TTD you can go to the Forms method and enter directly into the T2125.

     

    An important distinction is that Financial Trading is a 'Business' and not a 'Profession'. The NAICS or industry code would be 523000 for "Securities, commodity contracts, and other financial investment and related activities", see: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partners...

     

     TurboTax offers the value added service of Assist and Review for both TTO and TTD, where a Tax Expert can assist you in reviewing your return for accuracy and completion.  Our Product Support team as well as out community resources can assist you with more product related or general questions. See:  https://turbotax.community.intuit.ca/community/product-information/help/contact-us/00/873707

    ‎March 29, 2023 9:24 AM
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