Tax implications of futures trading

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
fxplusone
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Re: Tax implications of futures trading

Post by fxplusone »

fizikz wrote: If USD is held and sold later, how is that profit/loss reported when filing taxes?
I my view, we have 2 different transactions here:
- profit/loss resulted from your trade,
- profit /loss resulted from appreciation/depreciation of property, namely USD cash, when finally converted to CAD.
So you have to keep both transactions separately, at least when doing your tax calculations.

I am not familiar with the rules for reporting income/loss from currency appreciation. Newguy, could you please point out to relevant CRA resources ? It seems to me like capital gain, but you never know with CRA. :)
fizikz wrote: Which is better for trading US listed stock/futures: converting CAD to USD, or the implicit borrowing of USD against the CAD in the account? I'm guessing that the borrowing approach might reduce exposure to USD since it is only in effect during a trade, but will incur some costs due to interest.
I keep mine in CAD. You could start with CAD and convert to USD later, if you want. Cost of the borrowing is not that high, at least for futures/options. For shares it could be higher, as you could borrow more than you have. Check IB interest rate here http://www.interactivebrokers.com/en/in ... =schedule2 and do your math :). BTW, you will receive interest on your idle CAD amount as well.
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newguy
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Re: Tax implications of futures trading

Post by newguy »

Here's the CRA on forex cap gains.

http://www.cra-arc.gc.ca/E/pub/tg/t4037 ... P927_70485

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Re: Tax implications of futures trading

Post by fxplusone »

Thank you, newguy.
BTW, how do you calculate your gain/loss. Do you use annual or monthly average rate or you do it for each day you have profit/loss? It could be time consuming if you have a lot of trades per year.
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Re: Tax implications of futures trading

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fxplusone wrote:Thank you, newguy.
BTW, how do you calculate your gain/loss. Do you use annual or monthly average rate or you do it for each day you have profit/loss? It could be time consuming if you have a lot of trades per year.
I calculate it on every trade. It's easy once it's automated by computer. I think kirkx also downloads his directly to computer. IB has a pretty good statement making utility.

There's another thread here about that stuff.
http://www.financialwisdomforum.org/for ... 8&t=110790

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fizikz
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Re: Tax implications of futures trading

Post by fizikz »

Thanks, fxplusone and newguy. These posts and links answer a lot of questions!
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Re: Tax implications of futures trading

Post by scorpionman »

Isn't forex gain or loss included in the cost basis and sale price?
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Re: Tax implications of futures trading

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scorpionman wrote:Isn't forex gain or loss included in the cost basis and sale price?
Yes but what if you had a foreign currency without buying or selling a foreign stock? There's also the question of how you get the cost basis and sale price into Canadian dollar equivalents.

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Re: Tax implications of futures trading

Post by Park »

I"ve never traded futures, so correct me if I'm wrong.

It looks like futures are taxed as capital gains. So if you want fixed income exposure in a taxable account, buy bond futures, and returns will be taxed as capital gains? If you have enough cash to buy bond futures, futures would seem the better option.

For leverage; I use margin at IB, but I'm starting to think about futures. It looks like all returns would be taxed as capital gains. And that includes the dividends priced into futures contracts. You wouldn't have to worry about foreign withholding taxes on dividends. The interest priced into futures contracts isn't tax deductible, but it will be the low institutional rate. And margin requirements overall seem lower with futures than with margin loans. So you run less risk of a margin call, or instead can increase leverage for the same risk.

OTOH, you can't defer capital gains, unlike with a margin loan.

I sense that I should stick to margin at IB, but I'd appreciate comments.
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Re: Tax implications of futures trading

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Park wrote:I"ve never traded futures, so correct me if I'm wrong.
In the first post is this link.
http://www.cra-arc.gc.ca/E/pub/tp/it346r/it346r-e.html
7. As a general rule, it is acceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses with the result that only one- half the gain is taxable, and one-half the loss is allowable subject to certain restrictions, (hereinafter called "capital treatment") provided such reporting is followed consistently from year to year.*
I've always used capital gains reporting, no trouble so far.

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Re: Tax implications of futures trading

Post by Park »

https://www.kitces.com/blog/whats-the-r ... ple-think/

Once again, I'm thinking about whether I should use futures, instead of a margin loan, as a source of leverage. As mentioned previously, you lose the ability to defer capital gains with futures. But the above link suggests that that may not be as big a drawback as I thought. I started a thread on that topic, as it may be relevant to investors not interested in futures.

Assume you're doing some deep value investing, and investing in Russia. Right now, the dividend on Russian stocks is around 5%. With futures, you could pay 23% tax on that dividend, as opposed to 46% if you owned the stock. That's an extra 1.15% return. And that doesn't take into account any withholding tax on the dividend, which a stock owner might not be able to recover.

From what I can see, commissions and bid ask spreads on futures are no more of an issue than they are with stocks.

The implied financing rate in futures seems to be around 0.6%

http://www.cmegroup.com/trading/equity- ... /main.html

The interest on margin loans are tax deductible, which isn't true for futures. The cheapest margin loans are probably from Interactive Brokers. For balances less than $US100K, it's 1.61%. Between $US100K-1000K, it's 1.11%, $US1000K-3000K 0.61% and $US3000K-200000K 0.50%. So even with tax deductibility, you have to borrow extremely large amounts of money to get interest costs on margin loans down to those of futures.

I used to think that in a taxable account, a margin loan from IB was the most cost efficient source of leverage. But futures may give margin loans a run for the money. And futures often require a smaller margin deposit; the emini looks like it has a margin deposit of around 6%. For a margin loan on SPY, it would be 30%.
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newguy
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Re: Tax implications of futures trading

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Park wrote:I used to think that in a taxable account, a margin loan from IB was the most cost efficient source of leverage. But futures may give margin loans a run for the money. And futures often require a smaller margin deposit; the emini looks like it has a margin deposit of around 6%. For a margin loan on SPY, it would be 30%.
A couple things, ES mini is ~2000 * 50 so 100K USD. You also have to plan on whether you want constant leverage or some plan to buy and pay down the debt. Like buy one contract and keep adding money until you can replace it with an etf. Or - keep buying and etf on leverage until you have enough to buy one futures contract etc.. The same goes for options as you'll be long an option which means you'll be long gamma so your delta is always increasing as the market goes up, ie. you get even longer or more leveraged. The good thing is option contracts are smaller and easier to manage.

All the data you need to figure out your answer is available from quandl. You can download continous contracts fro the front month, and the next expiry so you can see the roll amount. They also have stocks and fred data (for interest rates). Actually I'll get it for you, here's an r snippet for downloading the futures data

Code: Select all

library("Quandl")
# only want columns 1,7,8
cont1<-Quandl("CHRIS/CME_ES1", type = "xts", sort="asc")[,c(1,7,8)]
cont2<-Quandl("CHRIS/CME_ES2", type = "xts", sort="asc")[,c(1,7,8)]
both<-merge(cont1,cont2)
write.zoo(both,file="data.csv", sep=",")
Here's the data, I threw in the SPY and dividends along with tbills, the Fed Funds series isn't long enough.
data.zip
(83.76 KiB) Downloaded 31 times
Settle, is the front month ES contract, Settle.1 is the next month. Look at 9/19 when Volume went from 687 to 22081, that is when they rolled their front month. So what you would have done is sell on the 18th at 948 and bought at 957.75. That 957.75 then became the front month the next day and closed then at 961. I wouldn't really worry about the specific day you roll on unless you want the exact daily balance. You can just look up about the 10th of each 4th month (HMUZ) and figure the roll difference and the gain/loss on that day. Your balance will just be off a bit until their data rolls. You can't hold these contracts long that long anyways because shorts initiate delivery. You should roll when Volume.1 > Volume.

You could also figure a .25 min tick spread. I'm pretty sure you can place a combo order and roll ES without having to pay the spread twice. It's like a $2 commision as well :lol: .

Code: Select all

	es1		es2	
Index	Settle	Volume	Settle.1	Volume.1
9/11/1997	908	2523	918.25	9759
9/12/1997	924	928	933.75	18496
9/15/1997	922	208	931.5	11749
9/16/1997	947	354	956	22723
9/17/1997	946	345	956	11588
9/18/1997	948	687	957.75	9880
9/19/1997	961	22081	971	0
9/22/1997	966.25	10148	976.75	5
9/23/1997	962	24778	972.25	11
Park
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Re: Tax implications of futures trading

Post by Park »

Merci beacoup newguy

Although I did give a link upthread suggesting that the capital gains deferral of a margin loan may not be great, it should be noted that in an ETF, one may not have to pay any capital gains tax until one wants to sell the ETF. See link below.

http://www.alphaarchitect.com/blog/2014 ... QUR-I7F9tj

Also, with present low interest rates, the tax deductibility of margin loan interest may not be a major issue. At present, the FFR is 0.11%. But it has been as high as 19.1%

http://research.stlouisfed.org/fred2/graph/?g=H2E

Under such circumstances, the tax deductibility of margin loan interest would be a major issue.
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Re: Tax implications of futures trading

Post by scorpionman »

I would be cautious about the liquidity cost of rolling over the future contract. From my experience with OneChicago, there is a cost to get in and a cost to get out and a cost to buy the new future. In fact, it could end up costing more than the equivalent margin financing. I would only do it if two conditions are met: 1) you need the extra 10% or whatever leverage and 2) the transaction cost plus tax saving via capital gains instead of dividends will be less than the equivalent dividend income minus margin loan expense.
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Re: Tax implications of futures trading

Post by newguy »

scorpionman wrote:I would be cautious about the liquidity cost of rolling over the future contract. From my experience with OneChicago,...
You must be talking about SSFs, ES has much better liquidity, probably the most.

Park, did you do any calculations?

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Re: Tax implications of futures trading

Post by Park »

http://www.cmegroup.com/trading/equity- ... d-etfs.pdf

Here's an article comparing costs of ETFS versus futures. Unfortunately, taxes aren't examined in detail, but it would be difficult to do so. The group behind the paper have a vested interest in futures, so keep that in mind. For example, average margin rates and average transaction costs are used for ETFs, but used best risk free interest for fully funded futures. Neverthless, I think it's worth looking at.
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Re: Tax implications of futures trading

Post by janus10 »

Sorry for picking up this old thread but I have not been able to find, through web search nor contacting and speaking with two people at CRA, what the last trade date is for 2016 when trading US futures.

I know that it is the: 23rd for Canadian securities; 27th for US securities; and 29th for Options. But, considering that futures settle same day, I was wondering if it would be the 30th for them or if I should use the 27th.

Since I have transactions on the 27th, 29th and 30th, it is relevant for accuracy.

If anyone has any experience, I would appreciate their input.

TIA
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DavidR
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Re: Tax implications of futures trading

Post by DavidR »

Basically CRA wants you to report transactions that settle on or before December 31.
("Last trade dates" are publicized to remind people that the settlement date for many/most transactions is not the same as the trade date.)
So if your futures trades settled in 2016, then report them in 2016.
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Re: Tax implications of futures trading

Post by janus10 »

Thank you, David. That makes sense.
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Re: Tax implications of futures trading

Post by yzeit »

The CRA has taken the position that actively trading stock index futures would be taxed on account of income, not capital.

See interpretation 2004-0101161E5 for reference.

https://taxinterpretations.com/cra/seve ... -0101161e5
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Re: Tax implications of futures trading

Post by yzeit »

With respect to commodity futures, note the position expressed in interpretation 9404215, as follows:

"In the case of commodity futures or commodities, the Courts have long established that trading in commodity futures or commodities is either a business or considered to be an adventure in the nature of trade, such that related gains and losses would be on income account."

https://taxinterpretations.com/cra/seve ... rs/9404215
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