How Options Are Taxed in Canada: A Plain-English Guide

In Canada, most individual investors report gains and losses on options as capital gains and losses, half of which are taxable. The main exceptions: if you trade options as a business, or (by the CRA’s default view) if you write uncovered options, the results can be fully taxable business income instead.

In short: an option buyer’s premium is the option’s cost. Selling or letting it expire creates a capital gain or loss, and exercising it folds the premium into the cost or sale price of the shares. An option writer on capital account reports the premium as a capital gain in the year the option is written. If it is later exercised, the premium moves into the share transaction instead, and the earlier year can be amended. Canada has no special 60/40 rule for index options.

This guide is based on the Income Tax Act (section 49 in particular), the CRA’s guide T4037, Capital Gains, and the CRA’s Interpretation Bulletin IT-479R, Transactions in Securities, as of November 2026. One honest caveat up front: the CRA has no current, dedicated guide on listed options for individuals. IT-479R is archived (the CRA says it will not update it), but it is still the CRA’s most detailed published statement on how it views options traders, and practitioners still cite it.

First question: capital account or income account?

Everything else depends on this. The same trade can be taxed two very different ways.

	Capital account	Income account
How much is taxed	Half of the net gain (the inclusion rate)	100% of the profit
Losses	Capital losses offset only capital gains	Business losses can offset other income
Typical taxpayer	An investor	Someone carrying on a business of trading

The inclusion rate as of November 2026

The capital gains inclusion rate is one-half as of November 2026. The federal government proposed in Budget 2024 to raise it to two-thirds for gains over $250,000 for individuals. It deferred that change in January 2025, and the Department of Finance’s tax expenditure report states that the government confirmed in Budget 2025 that it would not proceed with it.

The CRA’s default presumptions for options

Paragraph 25 of IT-479R sets out the CRA’s general positions:

Option buyers: gains or losses are “on the same account as the holder’s transactions in shares.” If you invest in shares on capital account, your bought options generally are too.
Writers of covered options: follow the treatment of the underlying shares.
Writers of naked options: gains or losses are “normally on income account.” However, the CRA says it will accept capital treatment “provided this practice is followed consistently from year to year.”

The bulletin adds that these presumptions may not apply where “the facts clearly indicate otherwise.”

Are you carrying on a business?

Paragraph 11 of IT-479R lists the factors the CRA weighs when deciding whether someone is trading securities as a business: frequency of transactions, short holding periods, knowledge of and time spent on the markets, financing with margin or debt, and the speculative nature of the positions. No single factor decides it. Active options traders tend to tick several of these boxes, which is why this question comes up more often for options than for buy-and-hold investing.

One relief that is not available: the subsection 39(4) election, which lets you treat Canadian securities as capital property permanently, does not cover options. IT-479R says a share option is not a “Canadian security” for this purpose.

The rest of this guide assumes capital account treatment unless it says otherwise.

If you buy an option

The premium you pay, plus commissions, is the adjusted cost base (ACB) of the option.

What happens	Result on capital account
You sell the option	Capital gain or loss: proceeds minus ACB
It expires worthless	Capital loss equal to the ACB. T4037 lists the expiry of an option you hold as a disposition.
You exercise a call	No separate gain or loss. Under subsection 49(3), the option’s cost is added to the cost of the shares.
You exercise a put	No separate gain or loss. Under subsection 49(3.1), your proceeds from selling the shares are reduced by the option’s cost.

Worked example: buying a call

Maple Widgets Inc. (a hypothetical company) trades at $50. You buy one call with a $50 strike for $2.50. One contract covers 100 shares, so your ACB is $2.50 x 100 = $250 (ignoring commissions).

You sell it later for $4.00 ($400). Capital gain: $400 - $250 = $150. Taxable capital gain: $150 x 1/2 = $75.
It expires. Capital loss: $250. Allowable capital loss: $125.
You exercise. You pay $5,000 for 100 shares. Their ACB is $5,000 + $250 = $5,250, or $52.50 a share. Nothing is reported until you sell the shares.

If you write an option

This is where Canada differs most from the United States. Subsection 49(1) of the Income Tax Act says that granting an option is a disposition of property whose ACB “immediately before the grant is nil.” In plain terms: on capital account, the premium you receive is a capital gain in the year you write the option, not the year it expires.

What happens next:

What happens	Result on capital account
It expires	Nothing further. The gain was already reported in the year you wrote it.
You buy it back	The cost of the closing purchase generally gives you a capital loss in the year you close.
Your call is assigned	Under subsection 49(3), the grant is deemed not to be a disposition. The premium is added to your proceeds for the shares you sell.
Your put is assigned	Under subsection 49(3.1), the premium you received reduces the cost of the shares you buy.

The amendment rule (subsection 49(4))

Because the premium is a gain in the year written, an option written in one year and exercised in the next creates a timing problem: you already reported the gain, but now it belongs in the share transaction. Subsection 49(4) handles this. If you file an amended return for the earlier year that excludes the option premium, by the filing deadline for the year of exercise, the CRA will reassess the earlier year. Individuals normally make the change with Form T1-ADJ, T1 Adjustment Request.

Worked example: a covered call across two tax years

You bought 100 Maple Widgets shares years ago for $40 each (ACB $4,000). In November 2026 you write one call with a $55 strike, expiring in January 2027, for $2.00, receiving $200. The strategy itself is covered in covered calls explained.

Case 1: the call expires in January 2027.

2026: capital gain of $200, taxable capital gain of $100.
2027: nothing further to report on the option.

Case 2: the call is assigned in January 2027.

2026: you reported the $200 gain on your original return.
2027: you sell the shares for $5,500. Add the premium: proceeds are $5,700. Capital gain: $5,700 - $4,000 = $1,700; taxable capital gain $850.
To avoid counting the $200 twice, you file a T1-ADJ for 2026 removing the $200 option gain, by the 2027 filing deadline.

Worked example: a cash-secured put

You write one Maple Widgets put with a $50 strike for $1.80, receiving $180, and set aside $5,000. The mechanics are in cash-secured puts explained.

It expires. Report a $180 capital gain in the year written (taxable: $90).
You are assigned in the same year. You buy 100 shares for $5,000. Their ACB is $5,000 - $180 = $4,820, or $48.20 a share. You do not report the $180 as a separate gain.
You are assigned in the following year. Same ACB of $4,820, and you amend the earlier year to remove the $180 gain under subsection 49(4).

Income account writers

If your option writing is on income account (for example, naked writing without the consistent capital election described above, or a trading business), the premium and any closing cost are business income and expenses, fully included. IT-479R paragraphs 28 to 32 describe how the timing works for writers and holders on each basis.

Superficial losses

Canada’s version of the wash sale rule is the superficial loss rule. T4037 describes a superficial loss as a loss on a disposition where you, or a person affiliated with you (such as your spouse or common-law partner, or a corporation you control), buy, or have a right to buy, the identical property in the period starting 30 days before and ending 30 days after the sale, and still own or have a right to buy it 30 days after.

Two option-specific points:

Buying a call counts as a “right to buy.” Selling Maple Widgets shares at a loss and buying a Maple Widgets call within the 61-day window can make the loss superficial.
Expiry is an exception. T4037 lists a disposition that “results from the expiry of an option” among the cases where the superficial loss rule does not apply.

A superficial loss is not gone. It is generally added to the ACB of the replacement property, so you recover it when you sell that property. Be especially careful about buying the replacement inside your own TFSA or RRSP: the loss can still be denied, and there is no non-registered position to add it to, so it may never be recovered.

Losses: what they can offset

On capital account:

Allowable capital losses (half of capital losses) offset taxable capital gains in the same year.
Unused net capital losses can be carried back three years or forward indefinitely, but only against taxable capital gains. They cannot reduce employment or other income (except in the year of death).

On income account, trading losses are business losses and can offset other income, which is one reason some people would like to be on income account. The CRA’s test is the facts, not your preference.

Index options and US-listed options

No 60/40 rule. Canada has no equivalent of the US Section 1256 regime. Options on the S&P/TSX 60 Index (traded on the Montreal Exchange) or on the S&P 500 are taxed under the same capital or income rules as any other option. There is also no year-end mark-to-market for individuals on capital account.

Foreign currency. Many Canadians trade US-listed options. T4037 says to convert amounts into Canadian dollars using the Bank of Canada exchange rate in effect on the day of each transaction (or another rate the CRA accepts). That means the premium, the closing cost, and any share purchase each convert at their own day’s rate, which can create a currency gain or loss on top of the options result.

How the Canadian and US exchanges differ is covered in how options markets work.

Where it goes on your return

Schedule 3, Capital Gains (or Losses): dispositions of options and the shares from exercise or assignment. T4037 says options are reported on line 6 of Part 3, alongside bad debts and foreign currencies.
Form T5008: your broker’s slip showing dispositions. These slips frequently report option premiums and assignments in ways that do not match section 49. Keep your own records of ACB.
T1-ADJ: to remove an earlier year’s option premium when the option is exercised in a later year.
Form T2125: business income, if your trading is on income account.

What can go wrong

Reporting the written premium in the wrong year. On capital account it belongs to the year you wrote the option, not the year it expired.
Counting a premium twice after assignment. Once it is folded into the share proceeds or cost, amend the earlier year.
Assuming you are on capital account. Frequent naked writing or a pattern that looks like a business can put you on income account, and the CRA expects consistency.
Trusting the T5008. Broker slips are a starting point, not a calculation of your ACB.
Triggering a superficial loss with a call. A “right to buy” counts.
Ignoring the exchange rate. US-listed options must be converted transaction by transaction.

The short version

On capital account, the buyer’s premium is the option’s ACB: selling or expiry gives a capital gain or loss, and exercise moves the premium into the share cost or proceeds. Under subsection 49(1), a writer’s premium is a capital gain in the year written; if the option is later exercised, the premium moves into the share transaction and the earlier year can be amended under subsection 49(4). Half of capital gains are taxable as of November 2026. Naked writers are presumed to be on income account unless they consistently report on capital account, and anyone trading as a business reports fully taxable income. Options inside a TFSA or RRSP follow separate rules, covered in options in retirement accounts.

This is general education, not tax or legal advice. Tax rules depend on your circumstances and change over time. For decisions about your own return, consult a qualified tax professional or the Canada Revenue Agency directly.