Understanding Day Trading

Day trading has become increasingly popular as online trading and stock-trading apps have made it easier for the average person to access and trade in the stock market.

Day trading normally refers to buying and selling a security in a single day. It is most commonly practiced in various stock, derivative, and foreign exchange (forex) markets. Day traders typically use high amounts of leverage and other trading strategies to try and make large profits on small price movements. Day trading successfully on a regular basis requires a high degree of skill, extensive research, and capital.

There are different strategic approaches to day trading, which each carry an inherent level of risk. Before considering day trading yourself, be sure to conduct your own thorough research, consider how much financial risk you’re willing to take, and never invest money you can’t afford to lose.

Day trading is often used as a platform for get-rich-quick schemes to lure beginners into fraud.

Can you day trade through your TFSA?

While you can buy, sell, and hold stocks within a TFSA, day trading or overly frequent trading through a TFSA may be considered a business activity by the CRA and flagged for audit. As such, you may then have to pay income tax on your trading activity, defeating the purpose of a TFSA.

When determining whether a TFSA should be subject to tax, the CRA would examine several factors including the duration of the holdings, the frequency of your trades, the quantity of securities traded, the time spent on trading, and your intention to hold investments and resell them for a profit. If the CRA determines your trades are an active business, you may be subject to higher tax rates for business income and not benefit from certain measures of capital gains and losses. Further guidance about transactions in securities can be found in CRA’s interpretation bulletin IT-479R.

If you hold stocks in your TFSA and are concerned that your trading frequency could be considered taxable as a business, you should consult a tax expert or a securities lawyer.

 

This post was adapted from two articles originally published by the Nova Scotia Securities Commission (NSSC), and shared here with their expressed permission.