Canada’s cryptocurrency tax policy is receiving more attention as Bitcoin and other cryptocurrencies have gained significant popularity over the past few years. This guide discusses how cryptocurrencies are taxed in Canada and provides tips on making tax compliance easy and fast for citizens through the use of cryptocurrency tax software.
Disclaimer: This guide is provided for informational purposes only. It is not intended to substitute tax, audit, accounting, investment, financial, nor legal advice.
The Canadian Revenue Agency (CRA) treats cryptocurrency like 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 where only 50% of income received from capital gains is taxable. For most Canadians that are casually investing in a cryptocurrency like Bitcoin, their associated income will be considered capital gains, not business income.
It is up to you to properly determine how your transactions should be classified.
John regularly buys and sells various types of cryptocurrencies. He pays close attention to the fluctuations in the value of cryptocurrencies and intends to profit from the fluctuations. His activities are consistent with someone who is engaged in the business of day trading. In 2017, John sold $240,000 worth of various cryptocurrencies, which he originally purchased for $200,000. His net profit is $40,000. Since John is actively trading in cryptocurrency, which is a commercial activity, he has to report business income of $40,000 on his 2017 income tax return.
Nick found a deal on a living room set at an online vendor that accepts Bitcoin. Nick acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Nick’s Bitcoin had increased by $500. The gain realized by Nick was on account of capital, so Nick has to report a $500 capital gain on his income tax return. However, only 50% ($250) of that capital gain is actually taxable.
For more information on whether your cryptocurrency activity should be taxed as business income or capital gains, please review the CRA’s guidance.
Similar to other investments, you trigger a tax reporting requirement whenever you dispose of your cryptocurrency.
A disposition refers to the way you get rid of something, such as by giving, selling or transferring it. In general, simply possessing or holding a cryptocurrency is not taxable. However, you trigger tax consequences when you do any of the following:
Simply put, when you dispose of your cryptocurrency by carrying out any of the activities mentioned above, you trigger a gain or loss that needs to be reported on your taxes.
On July 30, 2018, Jordan bought 100 units of Ethereum, which had a value of $20,600. For this purchase, Jordan used 2.5061 Bitcoin, which was trading at $8,220 per unit on that day, or the equivalent of $20,600. In this instance, Jordan disposed of that Bitcoin by trading for 100 ETH. Jordan originally purchased the 2.5061 Bitcoin on May 5th, 2018 for $15,000. Jordan’s capital gain is calculated as follows:
$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]
- $15,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]
= $5,600 capital gain
$5,600 capital gain taxed at 50% = $2,800 taxable capital gain
If, on the other hand, the original purchase price of the 2.5061 Bitcoins had originally been $25,000, but at the time that Francis exchanged them for 100 units of Ethereum they were worth only $20,600, he would have incurred a capital loss. The capital loss is calculated as follows:
$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]
- $25,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]
= $4,400 capital loss
$4,400 capital loss × 50% = $2,200 allowable capital loss
This example assumes that the cryptocurrency in question was held as an investment; however, if this transaction occurred in the course of conducting a business, the entire amount of $5,600 would need to be reported as income in the first transaction and the entire $4,400 would be reported as a loss in the second transaction.
To recap, you realize the gain or loss in your cryptocurrency whenever you dispose of it. Subtract the fair market value at the time of disposition from your original cost basis (purchase price) to calculate your total gain or loss.
The CRA requires the Adjusted Cost Basis (ACB) costing method to calculate your gains and losses on your cryptocurrency — unlike the U.S. which requires FIFO, LIFO, or specific identification.
Your ACB is the total average cost (in CAD) of each unit of that cryptocurrency at any given time.
For example, let’s say I have a series of buys of bitcoin:
9/9/18 - Buy 0.1 BTC for $1,000
9/10/18 - Buy 0.1 BTC for $1,300
9/11/18 - Buy 0.1 BTC for $900
My adjusted cost basis for 0.1 BTC would be $1,066.67 (1,000 + 1,300 + 900)/(3). My ACB for 0.3 BTC would be $3,200.
Therefore, if I sell 0.1 BTC for $1,500 two months later, I calculate my gain using this average cost basis.
Proceeds - ACB = Gain/Loss
$1,500 - $1,066.67 = $433.33 capital gain
$216.67 is taxed (50% * $433.33) as capital gains.
When you buy new amounts of bitcoin, the total ACB is recalculated to be the previous total ACB, plus the total cost of the new shares, plus any transaction costs. It can be helpful to leverage cryptocurrency tax software like CryptoTrader.Tax which automatically handles these calculations behind the scenes for you—including all transaction fees. You can also learn more about how ACB calculations work here.
These capital gains and losses calculations spark a variety of problems for cryptocurrency traders. Some traders have been trading crypto for months, possibly years, and haven’t been keeping track of their Adjusted Cost Basis or the Fair Market Value of their crypto in CAD at the time they traded it.
It's also not easy to keep track of CAD values for most trades as they are typically quoted in other cryptocurrency values, not CAD.
Both Cost Basis and Fair Market Value information is needed for traders to accurately file their taxes. Depending on the volume of trades you have carried out, calculating gains could become extremely tedious, and potentially impossible to do by hand if you haven’t been keeping perfect records. Because of this challenge, a lot of Canadian cryptocurrency users are using cryptocurrency tax calculators to automate the entire tax reporting process.
While mining cryptocurrency can at times be considered as a hobby, it’s more likely that you are generating business income through your cryptocurrency mining. This income should be filed along with any other normal business income. You can write off related expenses (like electricity).
For airdrops and hard forks, unlike the US where guidance is unclear, in Canada the cost basis is zero for these coins. Therefore when the coins are disposed the entire proceeds are considered capital gains (for individuals) or income (for businesses).
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.