How does Proceeds of Disposition and Adjusted Cost Basis work for shorts? I show many accountants my trading history and they say my income will definitely be classified as business income but all of them always say something along the lines of “ just because your reporting on T2125 doesn’t mean you can skip Proceeds of Disposition and Adjusted Cost Basis”
I need to provide Proceeds of Disposition and Adjusted Cost Basis for them to fill in the tax forms. If you borrow shares to sell before buying back at a lower price. Do you guys do Proceeds of Disposition first then Adjusted Cost Basis later?
For example,
- open short 1 NVDA at $1000 per share
Inventory Proceeds of Disposition of $1000
- Partial close short 0.5 NVDA at $900 per share.
PNL = Proceeds - Adjusted Cost Basis = $10000.5-9000.5= 50?
Result: Leftover inventory proceeds of disposition of $500 (0.5 NVDA at $1000 per share) for future short cover
My logic is that since PNL in POD-ACB is only ACB of the assets that were sold, not the assets in inventory for longs, the reverse is done for shorts, POD in inventory (open shorts) doesn’t count for PNL, only units that were covered. That way the dollar amount sold and the dollar amount bought is matched 1:1 and the leftover units goes in inventory for future close.
It’s weird, one accountant say only for forex you can just report net pnl, and some say for all markets (stocks, crypto, forex, etc) need ACB and POD for both shorts and long.
The CRA website give only basic examples, never forex trades, fractional units, short selling, leverage, etc
That could be the problem.
If you hired only one tax accountant, and they were given not only the trading history, but all of the business and personal details, then your business income statement for tax purposes could be figured out. If this is the first year of business, would be great to get it set up right! 
You won’t find the guidance you need on CRA, as this is a grey area that is often overlooked and misunderstood by many accountants, and misinterpreted for tax purposes. Depending on who you ask, you will get different answers. However, I do work full-scale with public companies who trade in high frequencies among derivative instruments, so I am familiar with the treatment.
Let me break it down for you …
Firstly, you need to identify the frequency of your trading activity. This will set the foundation for tax treatment. By the sound of it, you are trading quite frequently, holding instruments in inventory; this could theoretically be classified as running a trading business, and would therefore be reported on your schedule T2125 as business income.
Secondly, you need to understand that a short position is defined as type of derivative instrument (although not defined in the act itself, but has been defined upon by CRA). Derivatives are generally treated as income or loss for business purposes and taxed as such… they are not capital in nature, and this is also directly correlated with hedge accounting fyi.
In this scenario, all the accountants are right, but they all have a general misconception of where the applicability of reporting arises. When accounting for short selling, the net effect of your POD/ACB will be adjusted to the income account upon closing a trade. So yes, you need to track these balances as to accurately report the G/L, this should be common knowledge.
This should apply to ALL markets where you are trading, regardless of the type of instrument that is involved. The only difference that arises is when you are transacting in a capital nature, at which point you would report TCG or TCL.
1 Like