Crypto Tax Guide - How Crypto Taxes Work in Canada
Many people put money into cryptocurrency without thinking about taxes. However, the fact is that cryptocurrency has specific tax implications for investors to consider. Since crypto is still relatively new, it’s essential to keep updated on the latest laws and regulations.
While we can’t provide tax advice, we want to present you with some information to make calculating your crypto taxes easier. Please refer to Canada Revenue Agency’s bulletins for tax guidance for more details.
How is crypto taxed in Canada?
The Canada Revenue Agency (CRA) treats cryptocurrency as a commodity in the Income Tax Act. If you’re wondering how the CRA defines cryptocurrency, this is the definition they give on their website:
“Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it…Cryptocurrencies generally operate independently of a central bank, central authority or government…When we refer to cryptocurrency in this publication, we are talking about Bitcoin or other similar virtual currencies.”
Is crypto taxable?
Yes. In general, all income from crypto transactions is considered either business income or capital gains. Likewise, any losses are treated as business losses or capital losses.
However, taxpayers must determine whether their crypto activity results in income or capital. This affects the way you must file your income taxes.
In addition, take note that each type of cryptocurrency is considered a separate digital asset. Therefore, each one must be valued individually. For example, Bitcoin is valued separately from Ethereum.
What are the guidelines?
The CRA has a complete set of guidelines regarding crypto taxes found on its website. Below is a basic overview of these instructions.
When do you pay taxes on cryptocurrency?
You won’t be taxed if you simply buy and hold crypto. However, the moment you sell or transfer it, this counts as a taxable event.
There may be tax consequences for any of the following actions:
Selling crypto, giving crypto as a gift trading or exchanging cryptocurrency (including converting one cryptocurrency for another), converting crypto to government-issued currency such as CAD, using cryptocurrency to purchase goods or services.
What is considered a taxable event/disposition?
In addition to the general taxable events listed above, there are specific guidelines for determining whether your crypto activity falls into the category of business income or capital gain.
The CRA’s classification of crypto businesses includes mining, exchanges, ATMs, and trading. While business activities generally are repeated over time, even a single transaction may be classified as a business activity under certain circumstances.
If any of these apply, your crypto activities will be considered business income:
· You carry out activities for commercial purposes in a commercially viable manner
· You approach activities in a business-like way, including making a business plan and acquiring capital assets or inventory
· You promote products or services
· You intend to be profitable, even if there is no likelihood of short-term profits
But what if you are not engaging in business activities and you sell your cryptocurrency for a profit? In that case, you should report it as capital gains. This category applies if you make a profit from selling your crypto or your sale does not fall into the category of business activities that are outlined above
Only half of your capital gain for the year is subject to tax. For capital losses, they can only offset capital gains and cannot reduce other income sources.
When calculating capital gains, use the adjusted cost basis (ACB). This means you should calculate the average cost for each cryptocurrency throughout the year. For example, if you sold Ethereum four times in the tax year, your ACB is the average price of those four sales.
Where is it reported?
Taxpayers should report any taxable cryptocurrency transactions on their income tax form and file it with the CRA under the standard submission procedures. In addition, taxpayers who hold more than $100,000 in crypto may need to report it on a T1135 form. Contact your local tax advisor for further information if this applies to you.
How to keep track of transactions as well as gains and losses from sales
It’s essential to keep a detailed record of your crypto transactions and any gains you make from sales or trades. If you hold more than one cryptocurrency, each asset will be valued separately.
Take note that cryptocurrency exchanges have different record-keeping procedures. So, you should periodically export your account and transaction data to prevent the loss of any crucial information regarding your transactions. It is up to you to maintain the required records and documents for at least seven years.
Here is a list of the records that may be required for cryptocurrency tax purposes:
· Transaction dates
· Receipts of crypto purchases or transfers
· The value of each cryptocurrency in CAD at the time of the transaction
· Your digital wallet records and crypto addresses
· A description of any crypto transactions and the other party’s crypto address
· Records relating to your crypto exchange
· Any accounting or legal costs
· Any software costs related to managing your taxes
For crypto miners, you should also maintain the following records:
· Receipts for the purchase of crypto mining hardware
· Receipts regarding your mining operation expenses (power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
· Mining pool details and records
Taxes for different scenarios
Trading: Suppose you engage in crypto trading to buy or sell crypto within a short period to make a profit. In that case, this is classified as commercial income. Report this on your income tax return by subtracting your net losses from your net profits.
Investing: If you buy and hold crypto, this amount remains untaxed until you sell or exchange it for another cryptocurrency
Staking: There are no specific guidelines regarding staking. However, since it is a similar activity to mining, treating any staking rewards as taxable income is recommended.
Mining: Mining crypto is a taxable event. The tax rate depends on whether you are mining as a business activity or a hobby. If you’re just mining on your own as a hobby, any gains realized from selling mined cryptocurrency would be counted under capital gains.
Other- ICO, airdrop, forks: The CRA has not issued specific guidelines regarding crypto gained from ICOs, airdrops, or forks. However, the recommended approach is to pay a capital gains tax on any received crypto.
Crypto tax deductions & minimizing tax liability
What are the options for reducing your tax liability in Canada? Contact a tax professional for best practices, but here are two common methods.
Capital losses: If you sell any cryptocurrency assets for less than the cost you paid for them, you can count this as a capital loss and use it to offset your total capital gains. However, just as only 50% of capital gains are taxed, only 50% of capital losses can be deducted.
In addition, you should be aware of the superficial loss rule, which means you can’t claim capital losses on the same crypto that was bought within 30 days after it was sold.
Transaction fees: Trading fees are considered deductible costs. So make sure you have access to your transaction records, as this can amount to significant deductions if you trade often.
What information do I need to file my taxes?
Besides having the standard personal information you need to file your income tax, you’ll need some extra information to file your crypto taxes.
Download your transaction data from your crypto trading platform and verify the records to ensure it contains the correct information. Don’t forget to calculate any deductions from capital losses and transaction fees.
There are several crypto tax software providers on the market. Explore these options or discuss other options with a tax professional.
How much will I be taxed? Your personal tax amount will depend on whether your crypto transactions are considered business or capital income. Furthermore, it will depend on the value of your individual cryptocurrencies and the value of your transactions.
Can you pay taxes with cryptocurrency? No. The CRA does not accept payments made with Bitcoin or other cryptocurrencies.
What if I give or receive a crypto gift? The CRA has imposed a $500 limit for gifts given via cryptocurrency. The total amount given or received should not exceed $500 annually. Every dollar after this amount will be taxed.
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