Crypto Taxes In Canada: How (And Why) You Should Pay Them

December 2, 2021
Blog
Crypto Tax Canada

What Is Cryptocurrency?

Cryptocurrency is a type of digital money that is not legal tender. It’s a digital asset that serves as a means of exchange between parties who accept it. Cryptocurrency transactions are verified using strong encryption techniques. Cryptocurrencies exist independently of any central bank, authority, or government.

Is it business income or capital gain?

Whether you sell cryptocurrency to generate income or a capital gain, the cash you earn from selling crypto may be classified as business revenue or capital gains. You must first identify whether the income is business or capital before reporting it accurately.

The following are some of the most common indicators that you’re engaged in business:

  • If you perform for business purposes and in a commercially viable way, the activity is considered to be commercial.
  • You engage in commercial operations, such as planning a business plan and purchasing assets or inventory, in a businesslike manner.
  • You sell a product or service
  • You intend to make a profit, even if you are not likely to do so in the short-term

In some circumstances, a single transaction might be regarded as a business, so whether you’re operating a business or not must be decided on a case-by-case basis.

Other Factors

Another factor to consider when determining if a company is in business is the date the business began. If you’re still setting up or getting ready to start a firm, you might not be considered to have established it.

Before you start your business, any cash or property you obtain is not usually considered company revenue. Similarly, before a firm generates income, no deductions may be taken for tax purposes.

Some examples of cryptocurrency businesses are:

  • Cryptocurrency mining
  • Cryptocurrency trading
  • Cryptocurrency exchanges, including ATMs

Which crypto transactions are taxable in Canada?

Most people who invest in cryptocurrency don’t intend to hold it for long. They’ll almost certainly be trading it around. While you are not taxed when you own crypto, several events are taxable by the CRA, such as:

  • Selling crypto for fiat, i.e. CAD or USD
  • Selling or giving crypto to someone else
  • Using crypto to purchase goods or services
  • Trading crypto for crypto

It’s a taxable event whenever you buy, sell, or trade cryptocurrency, so you’ll need to report it on your taxes. There is no way around this, so prepare carefully.

How is cryptocurrency taxed in Canada?

In Canada, cryptocurrency is taxed like other commodities. For that year, 50% of the gains are taxable and added to your income. Assume you purchased a cryptocurrency for $1,000 and sold it for $5,000 later. You would have to report a capital gain of $2,000 (50% of $4,000).

The above example is for typical buy-and-hold investors. If you’re a high-volume trader, such as someone who invests in cryptocurrencies for only a brief time or day trades them, the CRA may consider it a business and require you to file your taxes accordingly.

Moving cryptocurrency from one wallet to another

If you’re just moving your cryptocurrency from one wallet to another—for example, from CoinSmart to Bitbuy or your own wallet—it wouldn’t be considered a taxable event, as long as you haven’t sold any of your coins during the move.

However, there may still be some tax implications.

Let’s assume you paid a $10 fee to move your crypto from one wallet to another. Later on, if you sell your crypto for a profit, you may deduct the transaction cost from the capital gains. The same goes for any costs you incur when purchasing or selling cryptocurrency.

Documents you need to file crypto taxes in Canada

Because cryptocurrency exchanges have terrible histories, you should not rely on them to get your whole trading history. You’re better off keeping a thorough record of all of your transactions.

It’s also critical to keep thorough records of your business transactions to report your taxes accurately. The CRA advises you should keep the following data:

  • Transaction dates
  • Buy and sell values
  • Units bought and sold

Whenever possible, you’ll also want to record the following:

  • Purchase receipts
  • Digital wallet records
  • Cryptocurrency addresses
  • Exchange records

As a general rule, you should keep as many detailed records as possible. The CRA recommends you keep these documents for at least six years in the event of a probe.

There’s nothing unlawful about cryptocurrency ownership or trading, but the CRA is entitled to its cut of taxes. You’ll need all of your paperwork to compute what you owe. They’ll come in handy if you’re audited in the future.

Cryptocurrency tax breaks

There are a few circumstances where cryptocurrency might help you lower your taxes. You can use any cryptocurrency losses to offset any future gains. Of course, this only applies if you have capital gains to report.

If you operate a cryptocurrency business such as mining, trading, or running an exchange, you may claim any business expenses relevant to your activities on your taxes. These expenses might include utilities, rent/mortgage, and computer equipment.

Trading cryptocurrency in your TFSA and RRSP

Investors will always try to shield themselves from taxes when pursuing any possible return. The next obvious question that people ask is whether you can trade cryptocurrency in my TFSA or RRSP.

No, you can’t currently deposit crypto into your TFSA or RRSP. Cryptocurrencies are traded on private exchanges like CoinSmart, which are generally not linked to other trading platforms that allow you to buy and sell stocks, options, and ETFs.

What if I don’t report my cryptocurrency gains?

If you don’t report your taxes or file them correctly, the CRA might penalize you later for tax evasion, which is a crime that may result in jail time. The CRA is unlikely to send you to prison, but it does want to make sure it gets paid.

You may be charged penalties and interest by the CRA if you don’t reveal your taxes or file them incorrectly. Although you may believe that the CRA can’t trace these transactions back to you, usernames and exchange details are kept on the public blockchain forever, so tracking them back to you is completely possible.

Adjusted cost basis accounting for the CRA

For capital gains tax purposes, crypto investors must utilize the adjusted cost basis (or average cost) method of accounting. In particular, the CRA instructs that you use the ACB as the cost of property in such circumstances.

If you bought Bitcoin at various prices and then sell it later, your cost basis will be the average cost you paid for those BTC purchases. This average price basis is combined across all crypto assets so that each cryptocurrency will have an average price basis.

In Summary

The issue of how cryptocurrency is taxed in Canada isn’t simple to answer, since there are numerous variables to consider. Canada’s tax system is fair, so don’t try to deceive it if you don’t want to get caught.

Crypto Taxes In Canada FAQs

Can I liquidate my crypto without paying taxes?

Trading crypto for fiat (e.g. CAD) is considered a taxable event by the CRA. Capital gains tax is required to follow CRA regulations.

Can the CRA track Bitcoin transactions? 

Yes. The CRA has previously requisitioned and received information from significant Canadian exchanges in the past. Furthermore, tax authorities throughout the world employ data matching to identify individuals with anonymous wallets.

How much is crypto taxed in Canada? 

The tax rate you pay on cryptocurrency is determined by various criteria, including whether you are trading as a business or as a hobbyist and your income level. Generally, your marginal tax rate will be applied to any crypto earnings, which means you’ll pay the same tax rate on crypto that you do on the income from your job.

Can I pay my taxes in Bitcoin? 

It’s presently not possible to pay taxes using Bitcoin. You may only make payments in Canadian dollars. You may pay your tax debt online using a debit card, credit card, wire transfer, or PayPal.

How Is DeFi Taxed In Canada? 

The CRA has yet to release certain clear guidance on several of the typical concerns associated with DeFi.

However, it’s reasonable to think that many of the same regulations that apply to cryptocurrency transactions will also apply to any DeFi-based transactions, including the following: 

  1. Transfers between cryptocurrencies
  2. Staking and yield farming income is treated the same as crypto mining income.

How Are Airdrops Taxed In Canada? 

In Canada, airdropped tokens are very new assets. As a result, when tokens are sold, the entire profits are taxed as capital gains (for individuals) or income (for businesses).

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