What are the badges of trade?
In one line: Badges of trade are the signs the CRA looks at to decide whether your trading is a business, taxed as income, or investing, taxed as capital gains.
How it works
In Canada, a gain from trading is taxed one of two ways. As a capital gain, only part of it is taxed. As business income, all of it is.
No single rule decides which. The CRA looks at the whole picture. The signs it weighs are called the badges of trade:
- How often you trade. Many trades a month looks more like a business.
- How long you hold. Days or weeks, not years.
- What you know. Training, a finance job or years of trading count.
- How much time you spend. Hours a day, every day.
- Borrowed money. Trading on margin or a loan.
- What you buy. Short-term, fast-moving bets more than steady holdings.
- Whether you hold yourself out as a trader. A trading desk, a newsletter, a company set up for it.
No one sign settles it. Several together tip the scale. As of October 2026, the CRA explains how it weighs trading, including trading inside a TFSA, on canada.ca. Check it there before you file.
An example (hypothetical)
Two made-up sellers each run the wheel strategy in a regular account.
Seller A sells one put or one call a month on two companies, holds shares for months, and has a day job in nursing.
Seller B sells options on twenty companies every week, uses margin, and spends most days on it.
Seller A shows few badges. Seller B shows many. Here's what the label can do in a year with a loss of $4,000, and a year with a gain of $4,000 (made-up numbers; say half of a capital gain is taxed).
| Year | Treated as capital | Treated as business income |
|---|---|---|
| Gain of $4,000 | About $2,000 is taxed | All $4,000 is taxed |
| Loss of −$4,000 | Only offsets capital gains | Can offset other income, like wages |
The label cuts both ways. A business pays more tax on gains. But its losses can count against other income.
Why it matters for sellers
Selling options can pile up badges fast. Weekly trades. Short holding periods. Lots of hours. Margin.
It matters most in a TFSA. Gains in a TFSA are normally tax-free. But if the CRA decides the TFSA is carrying on a trading business, that income can be taxed. The CRA's guide on what registered accounts may hold (Folio S3-F10-C1) names option selling directly: covered calls alone aren't seen as speculative, but selling puts or uncovered calls can be. See is selling options in a TFSA a business?
What to do:
- Keep a record of every trade, with dates and why you made it.
- Know your own pattern: how often, how long, how much time.
- File the same way each year unless your facts change.
- If you trade a lot, ask a tax professional which side you're on before you file.
For the bigger picture, see my map of selling options in Canada.
Questions
Is selling covered calls a business in Canada?
Not on its own. The CRA looks at all the badges together. A few covered calls a year on shares you hold is usually investing. Many weekly trades on margin look more like a business.
Can I choose capital gains treatment?
Partly. The facts of how you trade come first. For option sellers, the CRA's old bulletin IT-479R sets a default: a call sold on shares you own follows those shares, and options sold on shares you don't own, like a cash-secured put, are presumed to be business income. But the CRA says it will accept capital treatment if you report that way every year. So pick one and stick with it.
Do the badges of trade apply to a TFSA?
Yes. If a TFSA is used to carry on a trading business, the CRA can tax its income. Frequent option selling in a TFSA is worth discussing with a tax professional.
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