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Register FAQ Calendar Today's Posts Search. Please add your questions and answer whatever you can from the questions below. Can someone please advise regarding the following: In case, one buys or sells an option, what accounting entry does one do at the time of buying or selling the option AND what entry if the option expires unexercised AND what entry if the option is exercised? Is a partnership firm taxed any different? And what about Pvt. Company or Corporate body? I have never seen a negative stock, but then I have never done bookkeeping for stock market. Trading it advisable for a person engaged in another business to maintain separate books of account for his shares business? What may be the negative aspects that an ITO may add back to income, in such a case? Does statutory audit for a stock trading operation, whether in conjunction with another business or being the only business, need to cover any additional specific area? Sorry your browser does not support IFRAME. Looking for a share broker? Select State Andaman and Nicobar Islands Andhra Pradesh Arunachal Pradesh Assam Bihar Chhattisgarh Dadra and Nagar Haveli Daman and Diu Delhi Goa Gujarat Haryana Himachal Pradesh Jammu and Kashmir Jharkhand Karnataka Kerala Lakshadweep Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Odisha Puducherry Punjab Rajasthan Sikkim Tamil Nadu Telangana Tripura Uttarakhand Uttar Pradesh West Bengal Are you a day trader? Derivatives trading intra or positional does not amount to actual delivery, as everything is cash settled. The journal entry which I do in our books is: For option, I follow the same entry as above. At the end of the year, the MTM Equity Futures A? STT is not to be taken as an expense, and has to be adjusted against your capital account. Whereas, any loss in derivatives trading can be setoff against income from other sources like interest recd. Holding period of more than one year qualifies as Long term capital gain From taxation pt of view, following are different taxable entities: The Following 6 Users Say Thank You to Sunil For This Useful Post: Since I admire and respect the main purpose behind this thread, let me take various aspects separately. They are extracts from various guiding websites and by CAs. The Following 2 Users Say Thank You to Sunil For This Useful Post: Additional margins, if any, should also be accounted for in the same manner. Where instead of paying initial margin in cash, the Client provides bank guarantees or lodges securities with the member, a disclosure should be made in the notes to the financial statements of the Client. On the other hand, the credit balance in the said account, i. However, where a balance exists in the provision account created for anticipated loss, any loss arising on such settlement should be first charged to such provision account, to the extent of the balance available in the provision account, and the balance of loss, if any, should be charged to the profit and loss account. Same accounting treatment should be made when a contract is squared-up by entering into a reverse contract. It appears that, at present, it is not feasible to maintain the identity of the individual equity index futures contracts within the same series. The Following 10 Users Say Thank You to Sunil For This Useful Post: Section 2 aa of the Securities Contracts Regulation Act, defines derivatives in an inclusive manner as under: The focus of this article is therefore restricted to these futures and options. Futures contracts are normally traded on an exchange. To make trading possible, the exchange specifies certain standardised features of the contract. The exchange may also provide for guarantee mechanism to ensure that each party to the contract meets its obligations and, consequently, risk from default by parties is minimised. The difference between these two types of derivative instruments is in respect of the rights and obligations of the parties involved in such contracts. In case of a futures contract, both the parties are under obligation to complete the contract on the specified date. Unlike options, trading the premium fluctuates for a particular strike price, the price of the futures itself fluctuates for a particular maturity. The Finance Act has amended the proviso to section 43 5with effect from Assessment Yearto provide that derivatives trading transactions would not be regarded as speculative transactions, subject to the fulfilment of certain conditions. For the most part, therefore one needs to look at the normal provisions of the Income Tax Act and understand their applicability to derivatives transactions. Various issues do arise for consideration, more so, since there is also no case law on the subject, as futures and options transactions accounting of recent origin. To understand the taxation, one also needs to understand the accounting treatment. The ICAI Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options provides guidance as to how such transactions are to be accounted for. In substance, the Guidance Note provides that the profit or loss on the transactions are to be recognised only on expiry of the future or option or on squaring up of options position unless there is an intervening balance sheet. Till such time of expiry or squaring up, the initial margin, premium paid and mark-to-market margin is to be accumulated and shown as a current asset. If a balance sheet is prepared during the intervening period before expiry of the future or option, a provision is to be made for the notional loss, if any, as on that date on a mark-to-market basis, accounting no profit is to be recognised on such basis. Whether Always Taxable as Business Income: The most common issue that arises in taxation of derivatives transactions is that of whether derivatives transactions are always to be regarded as business transactions. It is true that in most cases, derivatives transactions would be regarded as business transactions on account of the following factors: The purpose behind entering into most derivatives transactions is to profit from short-term fluctuations in market prices. The period of any derivatives transaction cannot exceed 3 months, and such transactions are invariably short-term transactions. Often, the sheer volume of trades in derivatives transactions entered into by a person on an ongoing basis indicates that it amounts to a business. For such people, derivatives trading is an extension of their normal business activities. However, the issue of whether an activity amounts to a business or not depends upon various factors, and is not decided just because of accounting existence or absence of any one circumstance. There can be situations where derivatives transactions may not amount to a business. For instance, derivatives transactions may be carried on by an investor to hedge his investment portfolio. In such a case, the mere fact that the investor had to square up his derivatives position every 3 months and take up a fresh position, or pay mark-to-market on a daily basis, would not detract from the fact that the prime purpose of such transactions was to preserve the value of the investment portfolio. Another common practice in the stock markets is arbitrage between the cash market and the futures market. It is a well known fact that the difference in prices between the futures market and the cash market is primarily dictated by the short-term interest rates, and such difference is normally equivalent to the interest that one would earn on short term lending. Therefore, a person having surplus funds may buy shares in the cash market, while simultaneously selling an equal amount of futures of the same share in the futures market. He would take delivery of the shares bought in the cash market. On maturity of the futures, the shares bought in the cash market would be sold in the cash market. Since the futures would be squared off at the cash market price, the profit on the transaction would entries consist mainly of the difference between the initial purchase price in the cash market and the initial sale price in the futures market, with small adjustments for expenses such as brokerage, securities transaction tax, service tax and the market spread between the buying and selling quotes in the cash market. Are such arbitrage transactions business transactions, or are they really in the nature of interest seeking transactions? If one looks at the substance of these transactions, they are not motivated by a desire to earn profits, but just to avail of the benefit of the short term interest rates. The income element in the transactions is determined right at the outset, and does not fluctuate to any material extent, even if there is substantial volatility in the market. Going by the principle of the substance of the transaction, a view entries possible, as was being taken in the past in the case of vyaj badla transactions, that such transactions are in the nature of earning of interest, though they take the form of arbitrage transactions. It may be however noted that other factors, such as frequency of transactions, nature of other business carried on, etc. Exclusion of Derivatives from definition of Speculative Transaction: Such exclusion of derivatives transactions is however subject to certain conditions. This condition does not pose any difficulty, as all derivatives transactions on the National Stock Exchange or the Bombay Stock Exchange which today are the only stock exchanges in India offering derivatives transactions are electronic screen-based transactions. The transaction should have been carried out through a stock broker or sub-broker or other intermediary registered under section 12 of the SEBI Act, in accordance with the Securities Contracts Regulation Act,the SEBI Act, or the Depositories Act, and the rules, regulations or bye-laws made or directions issued under those Acts, or by banks or mutual funds. Since all derivatives transactions on NSE or BSE have to be routed through stock brokers, this condition also does not pose any difficulty. The transaction has to be carried out on a recognised stock exchange. The transaction has to be supported by a time-stamped contract note issued by such stock broker, sub-broker or other intermediary. This also poses no difficulty, as all contract notes now issued by NSE or BSE bear the time-stamp. The contract note has to indicate the unique client identity number allotted under SCRA, SEBI Act entries Depositories Act and the permanent account number of the client. The purpose of mention of UIN and PAN is to ensure that such transactions options one person are not recorded as the transactions of another. If, through PAN identification on the contract notes, such purpose is served, an assessee should not be denied the benefit for not complying with a requirement that is not otherwise mandatory for him. Take for instance, options day trader who trades in shares and also trades in derivatives. If he has incurred a loss in his share day trading activities, and earned a profit on his derivatives transactions of an equal amount, only the day trading loss will be regarded as a speculation loss, and the derivatives profit will be taxable as normal business income. What are the implications of derivatives trading transactions not being classified as speculative transactions? This would permit losses in derivatives trading to be set off against any other business income, including share trading profits, failing which, such losses can be set off against any other income. This would encourage investors to try their hand at derivatives trading. The Following 7 Users Say Thank You to Sunil For This Useful Post: The Following 4 Users Say Thank You to Sunil For This Useful Post: A speculative business is one specified under section 73 of the Income Tax Act. Any profit from a non-speculative business is taxable as business income. How is income from day trading in shares taxed? Is it added with the total income of the assessee and taxed as per slab, or does it have a separate structure? The day trading involves transactions in shares purchase and sale without taking delivery. How does it effect your total income? While the speculation income of Day Trading is added as Normal Income and taxed as per tax slab, trading the Speculation loss in day trading will only be adjusted with other speculation income. For example, let us say you have transacted in Reliance Shares in following manner: SET-OFF OF LOSSES document attached. The Following 5 Users Say Thank You to Sunil For This Useful Post: Thread Tools Show Printable Version. BB code is On. The time now is Advertise With Us - Forum Rules - Contact Us - Home - Archive - Privacy Statement - Top. You are currently viewing our boards as a guest which gives you limited access to view most discussions and access our other features. By joining our free community you will have access to post topics, communicate privately with other members PMrespond to polls, upload content and access many other special features. Registration is entries, simple and absolutely free so please, join our community today! If you have any problems with the registration process or your account login, please read the FAQ. Taxation Matters Taxation issues for investors and entries. Find All Thanked Posts. Page 1 of 7. Select State Andaman and Nicobar Islands Andhra Pradesh Arunachal Pradesh Assam Bihar Chhattisgarh Dadra and Nagar Haveli Daman and Diu Delhi Goa Gujarat Haryana Himachal Pradesh Jammu and Kashmir Jharkhand Karnataka Kerala Lakshadweep Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Odisha Puducherry Punjab Rajasthan Sikkim Tamil Nadu Telangana Tripura Uttarakhand Uttar Pradesh West Bengal. Are you a day trader? Illustration An example illustrating the accounting treatment of important aspects of equity index futures accounting is given in the Appendix to this Guidance Note. Appendix Illustration of Accounting for Equity Index Futures This Appendix does not form part of the Guidance Note and is merely illustrative. A purchases the following units of Equity Index Futures EIF: Date EF1 May Series Rs. EF2 June Series Rs. EF2 June Series on 1st April, A contract of units of EF1 May Series on 2nd April, The other contract of EF1 May series on 3rd April, Initial Margin Money paid in Cash: My salary income is Rs 2 options per annum. Under which head will I show my income from derivatives trading? If the income generated from day trading is treated as Businees income, then can we deduct expenses such as Rent on premises? Fee paid to Stock technical analysts? Investments made for Hardware and software? I am basically a trader in equity. I do normally settle the transaction on intra-day basis. Some time I take delivery for short term gain. I do have investment in share also which have holding period more than 12 months. Do I need to seperate trading activities as a Business income b Short-Term Capital gain c Long term gain which is not taxable. I do these online from home. I have strong doubt because demat charges includes for all the three activities and so can not be propotionised. Can that be adjusted fully against the income from business. What about the other charges such as society maintenance, electricity bill etc. In case of short-term capital gains from dealings in listed equity shares, can the following costs be reduced in arriving at the gain: After one month you sold balance shares of Rs Is a speculative business also to be taxed under the head capital gains? Can expenditure, such as depreciation on assets such as computer, air-conditioner, furniture and postage, telephone, conveyance, and so on, be claimed against speculative income? Options derivatives transactions are business transactions, the question then arises as to what constitutes the turnover in derivatives transactions for the purposes of section 44AB or for other purposes? I am engaged in buying and selling of shares. I do not take delivery of the shares and these transactions are speculative in nature. What is to be taken as the turnover for the purpose of determining whether a tax audit is required in such cases? I am currently doing four types of trading, 1. I purchase Infosys worth Rs. I purchase 1 Nifty future sells it for The above 4 trades may be repeated several times for profit or loss, but for simplycity and catching the essence i redused it! You may not post new threads You may not post replies You may not post attachments You may not edit your posts BB code is On Smilies are On [IMG] code is On HTML code is Off Trackbacks are Off Pingbacks are Off Refbacks are Off Forum Rules.
How To Create A Trading Journal - Log Your Trades - Options Trading TOOLS - How To Trade Options
How To Create A Trading Journal - Log Your Trades - Options Trading TOOLS - How To Trade Options
4 thoughts on “Options trading accounting entries”
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This means that you try to memorize things by connecting them to previously established knowledge.
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