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Unrealized profit on open future and options position

CA Raj Doshi (Practising CA) (8924 Points)

22 April 2021

Whether the unrealized gain be offered to tax on accrual basis or only on realization basis in the p/l account which is subjected to tax audit. ?

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3 Replies

CA. Sourav Sarkar (Chartered Accountant ) (24583 Points)
Replied 22 April 2021

It should be on realisation basis.

Both incomes or losses that arise from trading of futures and options has to be treated as a business income or loss and requires filing of returns using the ITR-4 tax form. Taxable income after deductions is also taxed.

Filing of income tax returns with regards to any income earned from the trading in Futures and Options is by and large confusing for most taxpayers. Most Futures and Options transactions are quite huge and take place on a regular basis with low profits generated. Due to the high number of transactions taking place for large amounts, the levying of income tax on the profit or loss obtained via these transactions is treated differently as compared to the profit or loss arising out of any other form of business. Keeping this in mind, income arising from the trading of Futures and Options could be treated either as business income or as capital gains.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 23 April 2021

If it is hedging instruments is measured at fvtpl, it goes to income statement. Can you tell me what option and future’s it is? Classification of instruments is first and then go by their treatment,

https://www.wirc-icai.org/images/material/Issues-in-Ind-AS-for-Swaps-Options-and-Forwards-new.pdf

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 23 April 2021

Like the question mentions, no real articles Online.

‘fundamental tax laws follow the real income theory which is the cornerstone of the taxation system. As per the theory, only actual profits arrived based on commercial principles should be chargeable to tax. ’

‘any notional gain or loss on change in fair value of the financial liability component of the CFI shall not be considered while computing the taxable income of the entity.’

While the above is true, I think (this is the standard) The difference between the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset. This is true even if:

the entity does not intend to dispose of the asset. In such cases, the revalued carrying amount of the asset will be recovered through use and this will generate taxable income which exceeds the depreciation that will be allowable for tax purposes in future periods;

this does impact tax through deferred tax. The tax act charges tax on real income and while the tax standard is somewhat based on timing of taxes.

For tax audit: realisation is important, while the tax standard IndAS 12 will create deferred taxes!!

Taxation notes should undergo major changes and made available for public on demand!!