Millennial Money:

Keep tax ramifications in mind and maximize your stock profits

Rohan wants to work toward saving, but can he do that with bills to pay and kids to care for?

When Haman Mamdouhi made $2,500 in profit from a $5,000 investment in Bitcoin last month, the tax implications weren’t exactly top of mind.

“Taxing is probably the last thing on anyone’s mind,” said Mamdouhi, who is in his early 20s and started investing casually in high school.

“The first thing is, ‘Oh, is Bitcoin something I should just get into, what’s going on?’ ”

However, the Toronto-based entrepreneur says first-time investors should carefully consider the kind of money they’ll have to pay in taxes, and how they can deduct expenses to maximize the money they keep.

With a recent surge in the value of Bitcoin, and massive profit for some traders from the rapid rise (and subsequent fall) of GameStop shares, tax specialists say there are multiple ways that new traders can declare their income and expense the related costs.

In Mamdouhi’s case, he said he can expense interest payments associated with a line of credit that he opened to further invest in Bitcoin. He said Quebec also allows people who mine Bitcoin to expense the computer equipment needed to do so, which can cost around $20,000.

Lisa Gittens, a tax expert with H&R Block, said the first step in filing taxes for new traders is to figure out whether they’re investing over the long term, or if they’re buying and selling their shares in a matter of days.

Long-term investments that span the course of months or years are generally treated as capital gains, meaning that only 50 per cent of a person’s profit will be taxed.

But if a person is buying and selling stocks in a short timeframe, like in the case of those who benefited from GameStop’s dramatic rise to over $460 (U.S.) per share in a matter of weeks, the profit would generally be considered business income, and 100 per cent of the profit would go toward your personal income tax bracket.

That means that in Ontario, an investor could expect to pay back at least 20 per cent of their profit in taxes if they were in the lowest tax bracket.

But Gittens said there could be exceptions if this was your first time dabbling in day trading.

“If it’s a one off thing that you just did this investment to try it, and you get a T-slip in the mail, you’d be reporting it … as investment income,” said Gittens.

“But if you look at this and you like it, and continue to (trade stocks), you’ll be reporting it as business income.”

For people looking to dive into day trading as a source of income, Gittens says the tax code gives Canadians opportunities to shelter their income in a registered retirement savings plan (RRSP) or a tax-free savings account (TSFA).

Canadians trading through an RRSP will have their profit treated as a capital gain and will only have 50 per cent taxed, Gittens said. The same can be true if you trade through a TFSA, but she said the Canada Revenue Agency can deny the shelter to your profits depending on how actively you trade through the account.

Day-traders also have multiple options when it comes to filing for expenses related to their work.

Gittens said people can deduct the cost of trading fees, management fees paid to stock brokers, or fees related to courses and registration with provincial securities commissions.