Options trading is high-stakes, highly strategic, and (let’s be honest) infinitely more exciting than watching a GIC grow at the speed of a tectonic plate.
Unfortunately though, their tax paperwork is the inevitable hangover. The admin can really feel like trying to solve a Rubik's Cube in the dark.
What’s worse is, getting it right isn’t just a matter of staying on the Canada Revenue Agency’s (CRA) good side. It’s also about your bottom line.
If you don’t understand how to properly track your costs and premiums, you’re probably overpaying on your taxes.
So, it’s time to make sure that the CRA gets exactly what they’re owed and not a penny more.
Business income or capital gains?
Before you even look at a single trade from last year, you have to answer a fundamental question:
Are you a casual investor or are you running a business?
In Canada, this is the first fork in the road. How you answer determines whether the CRA takes a bite out of 50% of your profits or 100% of them.
The default: capital gains
Most Canadians have a day job and trade options on the side to hedge a portfolio or generate a bit of extra income. The CRA typically views their profits as capital gains.
Currently, there is a 50% inclusion rate on realized capital gains in a year for individuals.
The exception: business income
If the CRA decides your trading activity looks more like a job than a hobby, they’ll mark the money you made as business income.
In this scenario, 100% of your gains are added to your taxable income. Ouch.
How does the CRA decide? They look at a few factors:
Frequency: How often are you trading? Are you making dozens of trades a day?
Duration: How long are you holding positions for? Minutes? Weeks?
Knowledge: Do you have specialized training or work in the financial industry?
Time spent: Do you spend eight hours a day staring at Greeks and candles?
Intent: Is your main goal to profit from short-term fluctuations rather than long-term growth?
If you’re day-trading 0DTE (zero days to expiration) options full-time, you’re likely running a business in the eyes of the law.
If you’re writing covered calls on your long-term bank stocks to squeeze out a 2% yield, you’re likely an investor.
The mechanics: premiums, ACB, and dispositions
This is where the rubber meets the road.
Options taxes revolve around the premium (the price paid or received for the contract).
How that premium is treated depends on whether you were the buyer or the seller.
You were the buyer
The premium
When you buy an option, the premium you pay isn't an expense you can deduct immediately. Instead, it becomes part of your adjusted cost base (ACB).
What happened?
| It expired worthless | This is the most common outcome (and the most painful). If your option expires out-of-the-money (OTM), the CRA treats this as a capital loss equal to the premium you paid plus any commissions. It’s a small silver lining on a bad trade. |
|---|---|
| I sold it before expiry | This is usually reported as a capital gain in the year the sale occurs. Capital gain or loss = the sale price - (the premium paid + commissions). For example, if you buy a call for $500 and sell it for $800, your gain is $300 (minus commissions). |
| I exercised it | If it was a call option: The premium you paid is added to the ACB of the shares you just bought. You don't report a gain or loss yet; instead, you’ve just made your future stock sale less taxable. If it was a put option: The premium you paid is subtracted from the proceeds of disposition (the sale price). It lowers your gain on the stock sale immediately. |
You were the seller
The premium
When you write an option, you receive a premium upfront. It might initially feel like a win, but the CRA is watching.
What happened?
| It expired worthless | You keep the premium! You report the entire premium (minus commissions) as a capital gain in the year the option expires. That is, unless the option is exercised. |
|---|---|
| I bought it back | This is usually reported as a capital gain in the year the purchase occurs. Capital gain or loss = the premium received - the premium paid to close. For example, if you sold a put for $4 and bought it back for $1 to close the risk, you have a capital gain of $3. |
| I was assigned | If it was a call option: The premium you received is added to the price you sold the shares for. If it was a put option: The premium you received is subtracted from the ACB of the shares you were forced to buy. |
Common compliance traps (and how to avoid them)
If the CRA had a "Greatest Hits" album of common errors, these two would be the lead singles.
The superficial loss rule
If you’re trying to do some tax-loss harvesting (selling low-performing shares, creating a capital loss to offset a capital gain), beware: the CRA really doesn't like it when you do this.
If you buy the same or identical property within 30 days of the sale, your loss is denied and added back to your cost base.
When you trade options, this can get blurry. Selling a stock at a loss and then immediately buying a deep-in-the-money call option on it, might cause the CRA to consider the option "identical" to the stock because the option basically gives you guaranteed ownership.
If the CRA deems your transaction a superficial loss, you can’t use it to offset your capital gains. You might also set yourself up for more scrutiny or even an audit in the future
The T5008 slip headache
Every year, your brokerage issues a T5008 (Statement of Securities Transactions). In a perfect world, you’d just copy the numbers onto your tax return and go for a hike.
In reality, Box 20 (“Cost” or “Book Value”) on the T5008 is notoriously unreliable for options. It often fails to account for premiums from expired options or the commissions you paid.
If you rely solely on the T5008, you might end up reporting a much higher gain than you actually had. Professional traders (and smart casual ones) usually keep their own spreadsheets to track ACB manually.
Allowable capital losses: your safety net
Trading options involves risk, and sometimes that risk realizes itself as a loss.
The good news? Those losses have a purpose.
Capital losses can be used to offset capital gains. But they can only be used to offset capital gains.
That means you can’t use a loss on call options to lower the tax you owe on your salary. But, if you don't have enough gains this year to use up your losses, you can either:
Carry them back up to 3 years to recover taxes paid on past gains.
Carry them forward indefinitely to offset future gains.
