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Day trading in Canada is entirely legal and a can even be a full-time job. Buy what are the rules of day trading? To learn more about day trading in Canada, day trading taxes and day trading for beginners, keep reading below.
Day trading is the process of purchasing and selling stocks over a short period of time, normally during a single day. The objective of day trading is to earn a small profit every day, which adds up to larger profits over time. In today’s complex financial markets, day trading is usually considered a full-time job. This is because strategy, education and time are required to be successful at day trading.
Rules around day trading involve how your gains are taxes and the types of account you can day trade in.
As the name tax-free savings account (TFSA) implies, all capital gains, dividends and investment income earned in a TFSA are tax-free. You might be wondering if day trading in a TFSA is possible in order to avoid paying taxes on your capital gains.
The CRA prohibits business activity from taking place within a TFSA. For this reason, if your primary source of income comes from day trading and you spend full-time hours operating your day trades, this is considered business income, not investment income. Business income is defined as income that takes active, deliberate efforts to earn. On the other hand, investment income is income that was earned passively. If you choose to day trade in a TFSA, it should be done with extreme caution. The CRA can monitor your registered accounts to flag for any potential day trading. If the CRA deems that business income was earned in a TFSA, all of the identified business income will be taxed.
Investment income earned within an RRSP is tax-deferred (unlike a TFSA, in which gains are tax-exempt). Like TFSAs, RRSPs are meant for personal use only. Day trading is still considered business activity in most cases, regardless of where it’s done. For this reason, day trading in an RRSP should be done with caution. Just like your TFSA, if the CRA deems that business income was earned in an RRSP, all of the identified business income will be taxed.
Because of the potential tax consequences of day trading in a TFSA or RRSP, any day trading in Canada should be done in a non-registered account. There are still day trading taxes to consider.
If you day trade every day and treat it like a full-time job, income from your trading is considered business income. If you only day trade now and then to earn some extra income, it would be considered investment income and would be taxed like all of the other interest, dividends and gains you earn in a non-registered account. In this case, you would be considered an investor, not a day trader.
As a general rule, day trading income is considered business income in Canada. If you consider yourself an investor who participates in day trading, be prepared to prove why to the CRA in the event that you’re audited.
Business income tax implications
You must report all of the business income you earn from day trading as such. If you’re a sole proprietor, this income would be reported on your personal income tax return. If you’re incorporated, you would report this income on your corporate tax return. Any losses you incur from day trading will reduce your business income. In addition, you can deduct expenses from your earned income. However, be mindful that the CRA outlines various rules about deductions to business income, which are outside the scope of this article.
Investment income tax implications
As a private investor, not a day trader, your income will be taxed like any other investments on the stock market. If you sold a stock for more than what you bought it for, you would have a capital gain. If you sold a stock for less than what you bought it for, you would have a capital loss. Only 50% of capital gains are taxable. This amount must be reported on your income tax return. Capital losses can only be applied against capital gains, not other types of income. If you don’t use the entire amount of your capital loss, it can be carried forward or backwards in other tax years.
A good place to start is to develop a strategy. Here are some common day trading strategies:
Are you interested in getting into day trading? If so, you might be wondering where to begin. Check out these tips on day trading for beginners:
To learn more about common mistakes beginner day traders make, check out 6 ways beginners lose money day trading.
Day trading is usually a full time job, not just a hobby. Day trading involves tax consequences, and you need to abide by CRA rules in deciding the type of account to execute these trades in. You need to be comfortable with executing your own trades, identifying investment opportunities, and using different trading strategies. Luckily there are general day-trading tips and suggestions for beginners to get you started.
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