Option Trading - Taxation

HcksawJimDuggan

Hi Folks,

Just wondering under what tax head is income from option's trading taxed? Is it treated in the same regard to an employee receiving stock options from their employer?

Or, Is the profit made on exercising the share option liable to tax as a trade profit and then once the shares are bought, the regular CGT rates apply?

Thanks in advance.

HcksawJimDuggan

Anyone able to help with the above?

draiochtanois

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HcksawJimDuggan

draiochtanois wrote: »

This post has been deleted.

Just thought it may not have been taxable (similar to spread betting)

I'd imagine there are a lot of cases where people lose money on option's trading so if the income is taxable then the losses can also be used against the individual's other income.

If you think of it from the tax man's perspective, would they be satisfied for large losses generated in this manner to be used against tax paid on PAYE income?

Peregrinus

If it's genuinely option trading[/i] - i.e. you are carrying on a trade of dealing in options - then the profits of the trade are taxed in the same way as the profits of any other trade. It is irrelevant that your stock-in-trade happens to be options rather than, say, antiques or groceries.

But if you just enter into the occasional transaction, without the system, method or regularity to suggest that you have a trade, you could argue that these are investment transactions, and that any gains are subject to CGT, not income tax.

GalwayMagpie

Peregrinus wrote: »

If it's genuinely option trading[/i] - i.e. you are carrying on a trade of dealing in options - then the profits of the trade are taxed in the same way as the profits of any other trade. It is irrelevant that your stock-in-trade happens to be options rather than, say, antiques or groceries.

But if you just enter into the occasional transaction, without the system, method or regularity to suggest that you have a trade, you could argue that these are investment transactions, and that any gains are subject to CGT, not income tax.

How does this apply to multi leg strategies which have buys/sells and rely on premium as a means of profit?

Peregrinus

The structure of the transaction doesn't matter. What matters is whether you are entering into the occasional one-off transaction, or if you are entering into transactions with system, method, regularity, frequency. Doing the latter is trading.

GalwayMagpie

Peregrinus wrote: »

The structure of the transaction doesn't matter. What matters is whether you are entering into the occasional one-off transaction, or if you are entering into transactions with system, method, regularity, frequency. Doing the latter is trading.

Just so I'm clear, occasional Options trades are subject to CTG, and frequent trading is subject to income tax?

What is occasional Vs frequent ?

Peregrinus

GalwayMagpie wrote: »

Just so I'm clear, occasional Options trades are subject to CTG, and frequent trading is subject to income tax?

What is occasional Vs frequent ?

It's not an easy line to draw, since there are more considerations than just frequency - the decision requires a holistic view covering system, method, organsation, motive, volume of transactions, time devoted to the activity, etc, etc. The Revenue Manual addressing the issue says this:

Whether or not, in any situation, a trade is being carried on is determined by an examination of the facts of the particular case and by interpreting those facts in the context of the badges of trade and of case law in so far as it applies. There is an infinite variety of possible factual circumstances so that no fixed formula can be applied to determine whether or not an activity can be classed as “trading”. In the vast majority of cases there will be no doubt about whether the activities constitute trading.

As a very broad generalisation, if your return comes from buying assets, holding them for a while, and then selling them at a higher price, without having added any value by working on the assets, moving them from one place to another, marketing or advertising them, repackaging them from wholesale to retail, etc, etc. - if your return is purely coming from movements in market prices - then Revenue will default to the view that you are engaged in capital transactions, not trading. Most taxpayers are happy with this since it tends to result in a lower tax bill, CGT rates being lower than marginal income tax rates. If you want to be treated as engaged in a trade it's up to you to make the case that you are a trader.

GalwayMagpie

Peregrinus wrote: »

It's not an easy line to draw, since there are more considerations than just frequency - the decision requires a holistic view covering system, method, organsation, motive, volume of transactions, time devoted to the activity, etc, etc. The Revenue Manual addressing the issue says this:



As a very broad generalisation, if your return comes from buying assets, holding them for a while, and then selling them at a higher price, without having added any value by working on the assets, moving them from one place to another, marketing or advertising them, repackaging them from wholesale to retail, etc, etc. - if your return is purely coming from movements in market prices - then Revenue will default to the view that you are engaged in capital transactions, not trading. Most taxpayers are happy with this since it tends to result in a lower tax bill, CGT rates being lower than marginal income tax rates. If you want to be treated as engaged in a trade it's up to you to make the case that you are a trader.

Clear as mud, not your fault, the revenue are specialists is broad ambiguity.

If I open a call spread with 30 DTE and sell it with 15 DTE, I never held the stock. Let's say I do something like this every week where does that leave my tax liability?

Calahonda52

GalwayMagpie wrote: »

Clear as mud, not your fault, the revenue are specialists is broad ambiguity.

?

In fairness the broad based ambiguity allows for less avoidance schemes for the elite, the lack of it on the legal side allowed Enron to happen

Peregrinus

GalwayMagpie wrote: »

If I open a call spread with 30 DTE and sell it with 15 DTE, I never held the stock. Let's say I do something like this every week where does that leave my tax liability?

1. It's irrelevant whether that you never held the stock. You're not dealing in stock here; you're dealing in options.

2. The Revenue will treat this as a series of transactions attracting capital gains tax unless (a) you actively make the case to them, with supporting detail, that you are carrying on a trade of dealing in options, and succeed in persuading them that you are, or (b) you're doing this on a scale, and with system, method and regularity, that persuades them to take the initiative and assess you on the basis that you are trading.

But in practice (b) is unlikely unless it's clear beyond doubt that you're an options trader. You really would need to be doing this on a professional scale.