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Approximately a bazillion people started trading stocks for the first time last year. Some got swept up in the GME frenzy (yes, that was somehow only last year), others just wanted to stave off some pandemic boredom. Whatever the case, a lot of rookie traders are now realizing — or will soon, whenever their 2021 tax documents hit their inbox — that, Oh yeah, I need to deal with taxes on all the money I made (or lost) trading last year. Which is why we decided to write this handy little article.
Below, Wealthsimple in-house tax expert Caroline Corbeil walks us through some filing must-knows for newbie retail traders.
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Let’s say I bought and sold some stocks for the first time last year and it just dawned on me that it’ll affect my tax situation. Scale of one to 10 — how panicked should I be?
Caroline Corbeil: I’m going with a solid 3. You can get that down to a zero if you figure out what your tax obligations will be and set aside money accordingly.
Well, any time you sell a stock or other asset, it’s what we call a “tax event.” Which means you have to report either a gain or a loss on your return. That number is pretty easy to calculate: just take the proceeds you earned (or lost) from a trade, then subtract what you paid for the asset. Next, divide that number in half, since Canada taxes only 50% of capital gains (provided trading isn’t your primary source of income). Last, apply your individual tax rate to that 50% chunk to get the total amount you’ll owe on your gains. Wealthsimple has a handy tax calculator to help you with the math.
Wait — you’re saying ANY time I sell a stock it’s a tax event? Does that mean I should have been tracking my trades all year long?
If you lived, like, a hundred years ago probably! Nowadays, just about every financial or investment company, including Wealthsimple, will send you a summary of your transactions for the year, detailing what you purchased; what you sold; and, most important, what you need to report as having sold. This info should be clearly summarized in your yearly tax documents.
Once you have these documents, it gets really easy if you use smart, simple tax software, like (cough, cough) Wealthsimple Tax, to file. Most will guide you through the entire filing process. Once you start entering your summary of investment income into the software, there will likely be a section to punch in the proceeds that you earned from stocks or crypto or similar investments. Enter that number, and the software will calculate the rest.
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You mentioned crypto. What the heck do I do about that?
Crypto, in all its newness, can feel a little scary. But the government treats crypto earnings pretty much like any other capital gain. Wealthsimple recently published a whole story on the subject, so I won’t bore you by rehashing it.
Good deal. So capital gains: I’ve heard that phrase a lot but I’m a little fuzzy on what it means. Explain it a little better?
Capital, the word, essentially means money, which in this case you’ve used to buy a financial asset — like a stock or a bond or crypto. A capital gain is when the price you sell an asset for is larger than the original purchase price. The government taxes financial assets when you sell them, after they have (hopefully) risen a bunch in value, rather than when you initially buy them, and treats the gains essentially as a form of income.
As I mentioned up top, one really nice thing about Canada is that capital gains are taxed only at 50% of their value. Which means if you buy a stock for $500 then sell it for $1,000, only half of your capital gain ($500) is reported on your tax return, which is then taxed based on your overall total income. (Check your tax rate here.) Things get a little more complicated when you start talking about things like interest and dividends, but that’s the gist.
What about capital losses? Say I had the opposite of beginner’s luck with my trades.
The one silver lining with losses is that you can subtract them from past or future gains to lower your overall tax bill. So, say in 2021 you lost $500 on a bad stock trade, but you made $300 selling another. So your net loss is $200. Well, you can do two things with that negative $200: report the capital loss on a tax return from the last three years when you did have overall gains. Or you can carry the loss forward to a future year when you do have gains and apply it then. The hitch is that you can’t use a capital loss to offset other kinds of income — just capital gains.
OK, this is starting to make sense. So, to sum up everything, what’s the one thing I need to remember to avoid a tax nightmare?
The main thing is super important but really easy: print off or save whatever year-end trading summary you get from your financial institution, which will detail your annual gains and losses. Because if you don’t have those, you won’t be able to accurately file your taxes. These summaries generally become available in February or March; your financial institution might make your life really easy by providing you all that information on a T5 or T3 slip. Either way, at the end of the day, just make sure you get your yearly trade summary. Easy, right?
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