Having trouble navigating the Canadian tax code?
All across the world, governments are still figuring out how to tax the rapidly-evolving cryptocurrency space. Canada is no exception. Unfortunately, that means crypto investors often end up feeling overwhelmed and confused on how to deal with their tax returns.
In this guide, we’ll break down Canada’s cryptocurrency tax rules based on the latest guidance from the CRA and Revenu Quebec. This article will cover how cryptocurrency is taxed in Canada, how you can report your taxes, and a few simple ways to reduce your tax liability.
The Canadian Revenue Agency (CRA) treats cryptocurrency as a commodity for tax purposes.
This means that any income you receive from transactions involving cryptocurrency is treated either as business income or as a capital gain—depending on whether or not you are operating “as a business” or simply “as a hobby”. Similarly, if you incur losses, these are treated as either business losses or capital losses for tax purposes.
In Canada, these two different forms of income—business income vs. capital gains—are taxed differently. 100% of business income is taxable while only 50% of income received from capital gains is taxable.
Remember, the total amount of tax that you pay is dependent on what tax bracket you fall under. Here’s a breakdown of tax levels during the current tax year.
There is no legal way to avoid paying taxes on cryptocurrency in Canada. While crypto transactions are conducted anonymously, the CRA does have the right to demand customer data from crypto exchanges. It uses this data to figure out who has crypto-related income that should be reported on taxes.
There’s no tax for simply holding cryptocurrency. Most of the time, investors trigger taxable events through dispositions (events when they get rid of their cryptocurrency).
Here are a few examples of cryptocurrency dispositions.
Despite the fact that they were designed for transactions and not for investments, trading away stablecoin is still considered a disposition subject to capital gains taxes (however, your ‘capital gain’ will likely be close to zero).
No. Moving cryptocurrency between wallets is not considered a taxable event. However, you’ll want to keep track of these transfers so you can easily calculate your cost basis when a taxable event does occur.
To accurately report your taxes, it’s important to keep detailed records of your transactions. The CRA recommends that you keep track of the following information:
The CRA recommends that you keep these records for at least six years in case of an investigation.
Capital gains from your cryptocurrency transactions should be reported on Schedule 3 Form. Your business income on the other hand should be reported on T2125 Statement of Business or Professional Activities.
If you are operating a cryptocurrency business, you are required to pay business income tax. Here are a few signs that you may be running a business.
The lines between being a business and being an individual investor can get fuzzy. Even a single transaction may need to be reported as business income if the goal of the transaction was to make a short-term profit.
If you’re unsure whether your cryptocurrency activity should be taxed as business income or capital gains, consult a tax professional.
If you’re running a cryptocurrency business, here’s an example that shows how your profit will be taxed:
Most retail investors are likely to pay capital gains on their cryptocurrency profits.
If you sell one of your cryptocurrency investments at a loss, you can claim a capital loss. Capital losses can be used to offset capital gains for the year. If you have more capital losses than capital gains, it can be carried forward to reduce your tax liability in the future.
While there’s no way to avoid cryptocurrency taxes, there are methods to reduce your overall tax liability.
Capital losses can be used to offset capital gains and reduce your overall tax liability. Many investors use this to their advantage and strategically sell cryptocurrencies that have declined in value to reduce their overall tax bill. This strategy is commonly referred to as tax loss harvesting.
It’s important to remember that the same 50% rule that applies to capital gains also applies to capital losses. Investors can only write off 50% of losses.
On the other hand, businesses can write off 100% of their losses on their income.
Pro Tip: Canada’s Superficial Loss Rule places some restrictions on writing off capital losses. You cannot claim a capital loss if you buy the same cryptocurrency 30 days prior to or 30 days after the sale.
If you’re running a crypto business, any cryptocurrency losses can be deducted from your business income and reduce your income tax liability for the year.
Transaction fees from transferring and trading cryptocurrency can be added to your adjusted cost basis and thus help reduce your overall capital gains.
If you are running a cryptocurrency business, you’ll be able to write off associated expenses. For example, a mining business can write off the costs of electricity and equipment.
The CRA requires the Adjusted Cost Basis (ACB) costing method to calculate your gains and losses on your cryptocurrency — unlike the U.S. which allows various methods such as FIFO, LIFO, or HIFO.
Your ACB is the total average cost (in CAD) of each unit of that cryptocurrency at any given time.
To better understand how this works, take a look at the example below.
Let’s look at how cryptocurrency mining is taxed for businesses and hobbyists.
If you are mining cryptocurrency as a hobby, you will incur capital gains when you dispose of your tokens. These tokens will be considered new assets with a cost basis of 0. Hobby miners are not eligible for business deductions.
Tokens generated from business mining should be filed along with any other normal business income. You can write off related expenses (like electricity).
DeFi is a rapidly evolving space and the CRA has yet to release clear guidance on some of the common issues associated with it.
However, it’s reasonable to assume that many of the same rules that apply to cryptocurrency will apply to transactions that take place in a DeFi setting. This includes the following:
It’s reasonable to assume that airdropped tokens are considered new assets in Canada. Therefore, when tokens are disposed of, the entire proceeds are considered capital gains (for individuals) or income (for businesses).
Let’s cap things off by answering a few frequently asked questions on Canadian cryptocurrency taxes.
Can I cash out cryptocurrency without paying taxes?
Trading cryptocurrency for fiat money is considered a taxable event. To comply with CRA laws, you will need to pay capital gains tax.
Can the CRA track Bitcoin transactions?
Yes. In the past, the CRA has demanded and received customer information from major Canadian exchanges. In addition, tax agencies around the world use data matching to identify individuals with anonymous wallets.
How much is crypto taxed in Canada?
The tax rate that you pay on cryptocurrency is dependent on several factors, such as whether you are trading crypto as a business or as a hobbyist and your income level.
Can I pay my taxes in Bitcoin?
Currently, it’s not possible to pay taxes with Bitcoin. You can only make payments in Canadian dollars. You can pay off your tax liability online through debit card, credit card, wire transfer, or Paypal.