# Taxes on short selling of stock



## Adaman (Aug 9, 2013)

Hey Everybody,

I am new to this forum, and just had some confusion about how capital gains or losses on short sales of stocks are treated tax wise. I have searched on this forum and elsewhere online, and there is very little information available on it.
From what I understand, capital gains or losses on short sales are treated not as capital gains or losses, but rather are to be reported as income. Does this mean I would report it under "Business Income" on the tax form? And what about a loss,
would that be reported as a negative under business income? Hopefully someone here has experience with this as I am totally new to this

Thanks

adaman


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## james4beach (Nov 15, 2012)

I have engaged in short selling off and on for the last decade and I've found there's very little documentation in Canada for tax treatment relating to short selling.

Me & a colleague have asked CRA numerous times, always got conflicting answers. We also asked my colleague's accountant, who is quite good generally, and he said it's not clear either but directed us to stick with capital gain/loss reporting.

I believe you can elect to do short sales on either the income account or the capital account, but you should pick one and stick to it. I've been reporting them as capital gain/loss, reported in the year the position is closed (so if I opened the short in 2010, traded the position in 2011, and covered to close the short in 2012 I would report it in 2012 tax year).

There are other questions that I've never found answers to. For instance while holding a stock short, you pay out cash in lieu of dividends. I've never found out how to account for these payments in lieu.


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## andrewf (Mar 1, 2010)

I thought it was pretty unequivocal that short sale proceeds are to be reported on the income account. Line 121 IIRC.

My question has always been in what year do you report the income. If you hold the short position indefinitely, do you never report the short sale income?


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## Adaman (Aug 9, 2013)

http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html

It says on paragraph 18 there that "The gain or loss on the short sale of shares is considered to be on income account (non capital gains or losses)" , but I have also heard of people reporting it as capital gains/losses. It would recieve favorable tax treatment being reported as capital gains/losses but I am not sure if the CRA would catch on to it, in your case james4beach it seems to be fine. i dont plan on shorting frequently so maybe i'll just try reporting as capital/gains losses for 2013 and see what happens.


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## Adaman (Aug 9, 2013)

Also, if I had a net capital loss for a year on a short sale, how does that work if it is reported as income? With a normal net capital loss you can carry it forward or backward to offset past or future capital gains. Does this work the same way with income, where the net capital loss would offset future income?

Thanks..


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## james4beach (Nov 15, 2012)

It's possible I received some bad advice from that accountant. In any case I have kept very thorough records, the precise buy & sell transactions, so if CRA wants to reclassify it that's fine.

Yes if the short sale resulted in a net loss, what do you do with the "negative" income?
Which line of your tax return gets the negative income?


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## MoreMiles (Apr 20, 2011)

It's the same as a professional gambler like poker play... it's taxable as an income.


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## caricole (Mar 12, 2012)

james4beach said:


> I have engaged in short selling off and on for the last decade and I've found there's very little documentation in Canada for tax treatment relating to short selling.
> 
> Me & a colleague have asked CRA numerous times, always got conflicting answers. We also asked my colleague's accountant, who is quite good generally, and he said it's not clear either but directed us to stick with capital gain/loss reporting.
> 
> ...


I agree 100% with james4beach, I have done it several times and never any question asked

There is somewhere in a bulletin a paragaph that reads something like this

ALL YOUR TRANSACTIONS SHALL BE OF THE SAME NATURE, CAPITAL GAIN OR INCOME, thus if you do regular buy and sell as capital transactions, the short transactions can be considered of the same nature

As for dividends paid on your short position, just take it as an expense same as interest paid on a margin account

My 2 cents:smilet-digitalpoint:hopelessness:


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## caricole (Mar 12, 2012)

james4beach said:


> It's possible I received some bad advice from that accountant. In any case I have kept very thorough records, the precise buy & sell transactions, so if CRA wants to reclassify it that's fine.
> 
> Yes if the short sale resulted in a net loss, what do you do with the "negative" income?
> Which line of your tax return gets the negative income?


You fill Schedule 3 capital gains

If your last line is negative (loss) you include schedul 3 with your incometax filing

You can claim this capital loss against any capital gains of the last 3 years if anny

If th loss can not be used or only partly used, the unused portion will be forwarded to be used against futur capital gains, and this will be mentioned in your tax assessment received after filing

Just make sure Schedule 3 with the negative amount on the last line is included with your taxreturn, because this negative amount goes nowhere on the taxreturn you are filing and some popular taxsoftware has difficulty swallowing a capital loss on transactions

If the loss is not filed, ARC can not take it into account for the future years

:stupid:each:


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## Homerhomer (Oct 18, 2010)

Short selling would be considered income unless the election is filed (form below).
http://www.cra-arc.gc.ca/E/pbg/tf/t123/

With that said I have seen them reported as capital gains (without election) and never seen cra ask any questions.


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## james4beach (Nov 15, 2012)

caricole said:


> As for dividends paid on your short position, just take it as an expense same as interest paid on a margin account


This is also what I did, as they are borrowing costs & margin expenses.


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## andrewf (Mar 1, 2010)

That election applies only to Canadian securities. How are foreign (ie, US listed securities) taxed?


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## silencer (Oct 4, 2014)

I also have this same question, for US stocks there is no way to elect them as capital, they have to be treated as investment income. If there is a net income loss for the year, where do I enter such loss?


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